Under this plan the required monthly payment will be based on your income during any period when you have a partial financial hardship. Your monthly payment may be adjusted annually. The maximum repayment period under this plan may exceed 25 years. If you meet certain requirements over a specified period of time, you may qualify for cancellation of any outstanding balance of your loans.
You’ll likely need one of these plans if you’re finding it extremely difficult or impossible to make monthly payments according to the promissory note you signed. If your income is reasonably good, and you want to cut your payments to improve your lifestyle, you’re unlikely to benefit and would probably be ineligible anyway.
The amount you have to pay is assessed on your actual earnings. The calculation is based on your “discretionary income,” which the U.S. Department of Education defines as “the difference between your income and 150 percent of the poverty guideline for your family size and state of residence.”
Which Plan Should I Choose?
There are three income- based plans, and all of them cap your monthly payments at the sum that would normally be due under your original loan agreement:
a) The amount you would be paying on a 12-year repayment plan with fixed monthly payments, adjusted according to your income, OR
b) 20 percent of your disposable income.
For Example: Based on a single person living in one of the 48 contiguous states or DC. The federal poverty guideline for 2015 is $11,770, and 150 percent of that is $17,655.
Your discretionary income is the difference between your actual income and $17,655. So, if you actually earn $20,000 a year, your discretionary income will be $2,345.
Your student loan payments would be 10 percent of that, which is $234 a year, or $19.50 a month. If you earn $17,655 or less, your payments are zero.
If your financial circumstances take a unfavorable turn midway through, you can update your loan servicer right away. so you can reduce your payment more quickly than waiting for your annual re-certification date.
What Does This Do to My Repayment Term?
As with all loans, the smaller your repayments, the longer your debt it takes to rid of them. However, I'm sure we all know you can't squeeze blood out or a turnip. Don't let your debt cause you stress and anguish.
After all, we can't take out debt with us when it's time to clock out. We all need a little help sometime.
What are the maximum repayment periods for each plan?
What if I Still Owe Money at the End of My Repayment Period?
If your income doesn’t go up as quickly or as much as you hope, and you still have a balance at the end of the 20- or 25-year period your plan is supposed to last. This is the really good news:
Your remaining outstanding debt is forgiven. The only downside? The financial benefit you receive when the loan is forgiven may be taxable. However, if that becomes an issue.
Talk with your accountant as she/he may be able to help you.
What’s the Bottom Line?
As with any loan in the realm of borrowing and lending. The longer you hold on to debt. The more you pay in interest. Unless you end up getting your student loans forgiven on the back-end
What are some common issues?
Pay close attention to your mailbox, phone calls, and make sure you set up an online account with your servicing company. Moreover, upload your application you submitted on the student.gov website along with any supporting documents, such as proof of income, public service loan forgiveness applications or any other documents they may asked you for.
Note: Applying for Student Loan Forgiveness could be one of the most gainful decisions you make in your lifeblood.