Are you getting ready to repay your student loan again? Consider an income-based option


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THROUGH Sydney lakeJuly 22, 2021, 02:00

Yu-Jui Huang, assistant professor of applied mathematics at the University of Colorado Boulder, worked on a study on the most cost effective way to pay off student loans, as seen in June 2021. RJ Sangosti — MediaNews Group / The Denver Post / Getty Images.

At the end of July, it was still unclear whether the freeze on student loan repayments would be extended beyond September 30, 2021. Many borrowers and federal student loan officers are not prepared to resume payments to the lender. fall, but there are still ways to feel more prepared, one of them being the Income Based Repayment Plan (IDR).

Income-based repayment plans set a borrower’s student loan payment at an affordable amount based on income and family size. The federal student aid office offers four different IDR options, which limit monthly contributions to just 10% to 20% of a borrower’s income. The rates are set to help borrowers repay their loans over a period of 20 to 25 years.

For borrowers who suffered wage cuts or unemployment during the pandemic, switching to an IDR plan could help ease the burden of returning to regular payments, according to student loan experts. This is because the payments are based on an individual’s most recent tax returns.

“There are great planning opportunities here for people with income-oriented repayment plans,” says Patti Hughes, director of the Lake Life Wealth Advisory Group. Seeking out an IDR plan “makes a lot of sense for people whose incomes fell during the pandemic to see if the payments would be lower given the new incomes.”

Who should be thinking about switching to an IDR plan?

As part of an IDR plan, borrowers must recertify their income and family size annually. People who found other employment during the pandemic and are now earning more can wait to renew their certification 20 months after their original due date. This will allow borrowers to use their old tax return showing the lowest income, which will result in lower payments.

While an IDR plan may be a good decision for some borrowers, it may not be the smart choice for others. This makes sense for borrowers looking to lower their monthly payments, which might not be the case for those whose incomes increased during the pandemic.

“You may not be eligible for certain income-driven repayment plans that require personal financial hardship,” Hughes reminds borrowers whose income increased during COVID-19.

IDR plans aren’t always suitable for high-income people, according to student loan experts, and if you’ve defaulted on your loans, that might not even be an option.

What are the IDR options?

The federal student aid office offers four IDR options that require borrowers to give up a portion of their income each month. Under two of the four plans, a borrower typically pays 10% of their discretionary income (the second option limits the amount to a maximum of the standard 10-year repayment plan).

Another plan requires 10% or 15% of your income, depending on when you became a borrower. The fourth plan derives 20% of a borrower’s discretionary income or what they would pay on a repayment plan with a fixed payment for 12 years adjusted for income.

Democratic congressional leaders, who have pushed for the cancellation of student debt and the extension of the repayment freeze, have warned of the IDR plans, calling the enrollment process “complex and lengthy,” arguing that ‘there are too many options for borrowers.

The Institute for College Access & Success, in a statement in late 2020, suggested consolidating the IDR program by providing only one option for borrowers to “help more borrowers access affordable payments and avoid devastating consequences of default ”.

Are there any further freeze extensions or debt cancellation planned?

Never say never. There have been some recent indicators that debt cancellation or forgiveness may be a possibility for student loan borrowers.

Congressional leaders, including Majority Leader Chuck Schumer, a Democrat from New York, and Senator Elizabeth Warren, a Democrat from Massachusetts, are strong supporters of a further extension of the freeze as well as the cancellation of the debt.

Politicians wrote to President Joe Biden in June 2021 asking him to extend the freeze until March 31, 2022, which Robert Kelchen, associate professor and chair of the Department of Education Leadership, Management and Policy at the University Seton Hall recently said. Fortune “seems to be on a 50-50 proposition.”

The Education Department also recently hired a hired student debt cancellation lawyer and Warren’s ally, Toby Merrill, as deputy general counsel in the department’s office of the general counsel. His research was used to support Warren’s 2020 presidential campaign proposal to order the Education Secretary to write off $ 50,000 in student debt from each borrower.

Biden has said during his campaign that he supports repayment of $ 10,000 per borrower, but his funding was omitted from his latest budget proposal.

“That doesn’t mean all hope is lost,” said Bruce McClary, senior vice president of communications for the National Foundation for Credit Counseling (NFCC). Fortune. The cancellation of student loans could still occur in the future, he adds.

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