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Income Based Student Loan Repayment Plan

Income Based Student Loan Repayment Plan

Income-based repayment is one of the biggest benefits of the federal student loan system. Unfortunately, it can be confusing which plan to choose. If you have drastic income changes during your career, it can affect how your income-based repayment is calculated.

Student Loans: 11 Facts About Income Based Repayment

Once you graduate, your federal loans will be rolled over into a 10-year fixed repayment plan. This plan taps your debt in a very short period of time. The problem is, if you borrow more than a dollar, your monthly payment will be much higher.

Hence, from the early 1990s, the Department of Education introduced income-driven repayment (IDR) schemes; The first of which is the income-contingent repayment ICR scheme, which is not huge. Today, there are four IDR programs to choose from, including Pay As You Earn (Cash), Precious Education Savings (SAVE), formerly known as REPAYE, Income-Based Repayment (IBR), and ICR.

President Biden’s Department of Education has released details of his new SAVE program with more generous repayment terms and student loan forgiveness opportunities.

We’ll show you some real examples of how to choose the right student loan repayment plan. Use Student Loan Planner’s free repayment calculator to see how your payments will change as your income changes. It’s the best around. Let’s start with some basics you need to know before entering numbers into the calculator.

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Some student loan borrowers think of “income” as their gross paycheck, while some borrowers think of “income” as coming into their bank account. In the world of student loans, there is only one definition of income — your adjusted gross income (AGI).

This is the number specified in your tax return. In fact, if you dig into your 2022 tax return, it’s line 11 on your Form 1040.

How is the income-based repayment amount calculated? It depends on which IDR plan you choose, but there is a general income-based repayment formula that you can start with.

Income Based Student Loan Repayment Plan

1. Start with your AGI. Then, deduct 150% of the federal poverty guide level for your family size (the new SAVE program allows for a 225% deduction). This is your discretionary income in the world of student loans.

Income Based Repayment Tops Repayment Plan Choice For First Time

2. Once you know your desired income, multiply by 10% to save or pay or 15% to IBR. If in SAVE, only bachelor degree holders can multiply by 5%.

Bonus, our free student loan calculator does all of this complicated math for you. I know some readers are as embarrassed as we are, but it’s all done by the calculator, so all you really need to know is your income.

Now that we know how income is defined and how income-based repayment is calculated, let’s look at some examples.

Let’s say you leave your MBA with $125,000 in federal student loans and start a job on the low end of the spectrum to “learn the ropes.” You expect to earn about $60,000 a year, but you expect your salary to grow very quickly—about 7% a year—for the next 10 years.

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You’re currently single for simplicity (but we’ll see the marriage example later). Here’s how your income grows and your options for student loan payments.

Once you graduate, you’ll be automatically enrolled in a standard 10-year plan with monthly student loan payments of $1,388 per month. This is painful for a new professional starting at a $60,000 salary.

Using a 4% interest rate and a 20-year repayment period, refinancing would pay $757 per month. You’ll need to qualify for a low refinance interest rate like 4%, so you’ll need good credit or a cosigner.

Income Based Student Loan Repayment Plan

The most favorable income-based options are REPAYE, PAYE or IBR. Both Repayment and Payment are 10% of your discretionary income, against which IBR is 15% of your discretionary income. In this situation we will go with PAYErepayment. Paying $339 a month is more manageable than $1,388.

President Biden’s Save Plan

As you see income increase, whether that increase is 1% per year or 7% per year, your monthly payment gradually increases.

In terms of total cost to repay the loan, the fixed 10-year plan is the best option, but remember the monthly payment? That’s $1,388 per month. Alas.

Under the PAYEscenario, you’ll start with lower monthly payments of $339/month and end up spending $178,121 on your student loan repayments. You’ll need to save $100 per month in a taxable brokerage account to pay approximately $38,000 in taxes over the life of the loan (20-year repayment period).

In terms of today’s dollars or net present value (NPV), PAYE is the winner, but it is much closer to total NPV in the refinance scenario. That’s why paying off loans from your MBA is complicated.

Nelnet Income Based Repayment Form Pdf

Understand that you could pay anywhere from $165,000 to $275,000 on a $125,000 student loan debt, and you should consider paying these off aggressively to avoid as much interest as possible.

For future reference, once Biden’s ITR regulations come into effect, the analysis for graduate borrowers will require paying in PAYE / New IBR for 20 years or REPAYE / SAVE for 25 years.

In this scenario, our recent MBA graduate will marry a nurse in 2025 who earns $75,000 a year. They decide to file taxes jointly. This significantly changes the situation for our MBA borrower.

Income Based Student Loan Repayment Plan

Standard 10-year and private student loan refinancing results are similar, but all three income-based repayment options change drastically. For example, under PAYE in 2026, our MBA borrower’s payment increases from $367 to $1,028 on top of their spouse’s income.

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PAYE is now the worst case scenario. The loans will be paid off by 2039, but refinancing to a lower interest rate and paying over 20 years is the best option in today’s dollars.

Now is the best time to file your taxes separately. If you file separately, you are allowed to exclude your spouse’s income from your loan payment calculation. This may not work for everyone, and you may miss out on some benefits:

In our final scenario, we’ll switch gears and look at how your income-based repayments are calculated with a drastic increase in income.

A physician is completing their residency or fellowship where their annual income ranges from $50,000 to $225,000 per year. They work at a non-profit hospital and got married in 2021. This borrower plans to have children in 2025.

Income Driven Repayment Idr Plan Request Form 2022 Pdf: Fill Out & Sign Online

As you can see, since we are talking about income-paying repayment plans, the higher the income, the higher the payment. A standard 10-year plan would require monthly payments of $4,441 based on their $400,000 student loan balance.

Private refinancing is best at about $2,424, but the IDR reduces that burden somewhat, especially if this particular doctor works at a nonprofit hospital.

Although the couple decided to keep their tax situation simple and file jointly, our doctor still comes out on top because of Public Service Loan Forgiveness (PSLF).

Income Based Student Loan Repayment Plan

Specifically, a residency, fellowship, and a few years of non-fellowship work at a nonprofit hospital can save over $300,000 compared to a physician’s next best option—a standard 10-year reimbursement plan that pays $4,000+.

Student Loan Repayment

Does it feel completely overwhelming? It’s too complicated, and that’s why we’re here for you. Schedule a consultation with us and we will review your unique circumstances. Having a customized student loan plan can take a huge weight off your shoulders.

Take our 11-question quiz to get a personalized recommendation for 2023, whether you’re considering PSLF, Biden’s new IDR program or refinancing (including a lender we think can give you the best rate).

Molly Laughter is a CFA® Chartered, CFP® and Certified Student Loan Professional (CSLP®) advisor to Student Loan Planner since 2021. He became curious about the issues of student loans from his own experience after completing his MBA. In 2013. Molly is the founder of Laughter Financial. He previously worked as a financial planning assistant at SGS Wealth Management and RGT Wealth Advisors as Operations and Investment Analyst.

All rates listed represent the APR range. Commonbond: If you refinance over $100,000 through this site, $500 of the cash bonus listed above will be paid directly by the student loan planner.

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