How to Make Federal Student Loans Affordable

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Recent college graduates are currently enjoying a luxurious six-month grace period on their federal student loans. The government offers this breathing room to give graduates a chance to find a job and actually be able to afford paying back loans. But even those graduates who manage to find employment may not actually be able to cover the cost of student loans on top of monthly living expenses. Fortunately, income-driven repayment programs make federal student loans manageable for those struggling to make ends meet.

Income-Based Repayment

The most frequently used of the income-driven repayment plans, income-based repayment, has two different rates. The first one is available for borrowers who weren't new on or after July 1, 2014. This plan generally requires you pay no more than 15 percent of your discretionary income. Discretionary income is determined as the difference between your adjusted gross income and 150 percent of the poverty line for a family of your size in your state, according to federal poverty guidelines. IBR payments are then made for 25 years. After that time any remaining balance will be forgiven.

For borrowers on or after July 1, 2014, the rate drops from 15 percent of your discretionary income to 10 percent. Payments are made for 20 years before the remaining balance will be forgiven.

Payments aren't permanently set, as those enrolled in income-based repayment must submit their salary and family size information each year. Payments can increase or decrease based on this information, but you won't be removed from the program if your salary sees a significant increase. You also will never be paying more than the 10-year Standard Repayment Plan amount. However, it may be worth it to drop income-based repayment and repay your loans at an accelerated pace to save on the interest, so always be sure to do the math.

Pay As You Earn

Pay as you earn is the newest income-driven repayment plan. It's similar to the second income-based repayment rate as your payment is capped at 10 percent of your discretionary income and any remaining balance is forgiven after 20 years.

In order to be eligible, you must be able to prove partial financial hardship and be a new borrower as of October 1, 2007 and have received a disbursement on or after Oct. 1, 2011. This means students who matriculated (to undergraduate or graduated school) in the fall semester of 2008 are eligible.

Like the income-based repayment plan, you must resubmit paper work each year and payments may change. However, you will never be paying more than the 10-year Standard Repayment Plan amount.

Income-Contingent Repayment

Income-contingent repayment is the grandfather of income-driven repayment plans and also the least attractive. You will either pay 20 percent of your discretionary income or the fixed payments on a 12-year repayment plan that has been adjusted according to your income.

There is no income eligibility requirement for Income-contingent repayment. Anyone with an eligible federal student loan can apply to make these payments. This is also the only income-driven repayment plan that allows for PLUS loans made to parents to eligible, if consolidated into a direct consolidation loan.

You can find a full list of loans and eligibility at

The Catches

The income-driven repayment plans offer breathing room to those struggling with student loans, but they don't come without some catches. If you apply for any income-based repayment programs, then keep these 5 things in mind:
  1. You will owe taxes on any amount of your loans that's forgiven.
  2. If you get (or are) married and file taxes jointly, it will impact your income and cause your payments to increase.
  3. Parent PLUS loans aren't eligible for income-based repayment or pay as you earn.
  4. Private loans aren't eligible for these programs.
  5. Always do the math on how much interest you'll be paying by lowering your payments and the repayment period. It could make you change your mind or consider refinancing to a lower rate.
Erin Lowry writes for DailyFinance on issues relating to millennials, money and personal finance. She is the blogger behind Broke Millennial, where her sarcastic sense of humor entertains and educates her peers. She is also the content director for MagnifyMoney.
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