The cost of education has risen dramatically in recent years. Today’s students have great demands placed on them to pay back their student loans and in many cases, they don’t know where to turn or which program to utilize for making payments. They know that if they don’t make the right choice, their credit score could be negatively impacted and they don’t always have people around them to advise them appropriately about their financial decisions.
As one who has walked this path before, my main goal is in helping Millennials and Gen X’ers with any financial decisions that arise and make sound financial decisions that will protect and benefit them in the future. The first step is in knowing what options are available to choose from for student loans.
THERE ARE FOUR, INCOME-DRIVEN REPAYMENT PLANS NOW OFFERED BY THE FEDERAL GOVERNMENT.
- The first is the Revised Pay As You Earn Repayment Plan (REPAYE Plan) where payments are generally based on 10% of one’s discretionary income. The good news is that with this plan the government will pick up a larger share of interest than with the PAYE plan. The down-side is, if there is a significant increase in one’s income, payments will go up, since there is no cap on the amount one needs to pay back.
- The second plan, the Pay As You Earn Repayment Plan (PAYE Plan), is also generally based on 10% of one’s discretionary income but students who are higher income earners will never pay more than the what they would pay under the 10-year Standard Repayment Plan.
- The third plan, the Income-Based Repayment Plan (IBR Plan), is generally based on 15% of one’s discretionary income. Here, there is a ten year cap for repayment using the 10-year Standard Repayment Plan amount.
- The last plan, the Income-Contingent Repayment Plan (ICR Plan), calculates the student’s loan amount based on whichever is lower: either 20% of their discretionary income or what the same rate one would for a fixed payment over a 12-year period, adjusted according to their income.
There’s more in-depth information on each of these by visiting: studentloans.gov.
Will You Benefit From The Income-Driven Repayment Plan? Yes and No.
In my opinion, income-driven repayment plans usually are beneficial in lowering federal student loan payments. However, if you decide to make lower payments or extend your repayment period, you will likely pay more in interest over time—sometimes significantly more. In addition, under current Internal Revenue Service (IRS) rules, you may be required to pay income tax on any amount that’s forgiven if you still have a remaining balance at the end of your 20 year repayment period.
All four repayment plans have pros and cons, and it can be difficult to choose one without knowing what the future will hold. If you are already enrolled in the PAYE program, consider changing to the REPAYE Plan if you are not yet making a ton of money, as the federal government will pay off more of your interest with that plan. You can login to Studentloans.gov to make that change.
If you need help with putting together a budget to pay off student loans, Brentwood Advisory Group’s millennial advisory services specifically focuses on the financial issues and challenges that face todays’ younger working person. We are available to help you choose the right payment plan as well as helping you adjust your budget to work with your student loan payments.
Students today do face difficult decisions — and paying off loans rates right at the top of the list. Brentwood Advisory Group is here to take the weight off of your shoulders when it comes to making this very important decision.
About Brentwood Advisory Group:
Brentwood Advisory Group is dedicated to providing investment management and strategic wealth planning to individuals and families by working closely with them, kind of like a personal CFO. For more information, please visit: www.brentwoodadvisorygroup.com.