“Income-driven repayment” (sometimes referred to as income-based repayment) is an umbrella term for student loan repayment plans that allow borrowers to make payments on their federal student loans based on their income. The plans – and there are several, including one called Income Based Repayment – use a formula tied to the borrower’s income and family size, resulting in a monthly payment that lasts for up to 12 months at a time. The borrower must then renew the plan before the end of that 12-month period by submitting new documentation of income. Any changes to income could result in changes to the monthly payment, but after making payments for many years (the repayment term depends on the specific plan), any remaining balance gets forgiven.
Income-driven repayment has enormous benefits to student loan borrowers, as it allows borrowers to have affordable monthly payments, even for large federal loan balances, and thus keep their federal loans in good standing. These plans also do not require full loan payoff, as there is a loan forgiveness “safety net” at the end of the repayment term.
But it’s not all sunshine and roses. There are some potentially serious drawbacks to income-driven repayment, and borrowers considering these plans should be aware of them.Read More