The Direct Loan Income Based Repayment Plan Explained

If you received a direct federal student loan, you will likely have the option for income based repayment. There are four basic repayment options on these loans: standard repayment, extended repayment, graduated repayment, and income based repayment, which is also called "income contingent" repayment. Each option offers unique benefits, but the income based option is often the most reasonable.

What Is Income Based Repayment?

Income based repayment simply means you owe a portion of your monthly income to pay off your student loan. Instead of owing the same amount each month, like the standard and extended repayment plans, your monthly bill will vary based on how much you are earning. With the graduated option, you will have low payments in the beginning and higher payments toward the end of your loan. These payments will typically change year-to-year, but they will not be sensitive enough to adjust month-to-month.

The income based option literally adjusts with each dollar you earn. If you receive a raise, a higher amount of your paycheck will be allocated to your student loans than previously required. With any drop in salary, you will owe less each month. This repayment option takes into account your cost of living to determine an appropriate sum to charge each month in repayment.

What Are the Advantages of Income Based Repayment?

One key advantage to this option is a grace period after graduation. This means you will not be responsible for starting payments the day you accept your diploma. Especially in a tough job market, this protection is essential. You will be able to take the time needed to locate employment and get your feet underneath you before you have to repay your debts. You may also have the option of spending some time traveling after school or taking similar breaks without the burden of a large student debt.

You may receive an offer for a low-paying or internship position upon graduation. This is often the case in highly desirable fields or with the non profit industry. Thankfully, with an income based option, you will still be able to take this type of offer without questioning whether your salary is high enough to cover your monthly loan sums. If you were to take a standard repayment option, some of these low-salary jobs may be out of reach for you in your first few years out of school. The flexibility of the income based option allows you to control your living expense based on your salary, not the other way around.

You will also have the option to defer your loans if you lose your job. Since the income based option relies on taking a portion of your salary, without a salary you will not be responsible for payments. You should realize that interest may still be charged during deferment periods. The flexibility offered by the income based plan can often mean you will be paying more over time for this reason. However, most individuals will find the decreased stress associated with paying back the loan in a time of crisis worth the extra sum in the end.


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