Tailoring Your Student Loan Payments to Your Income

Implementing an income-driven repayment plan application won’t affect your credit score; however, each year it is necessary to recertify your income and family size to stay eligible. Otherwise, payments will revert back to their standard plan amounts.

Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) plans provide loan forgiveness after 20 years of payments have been made, capping monthly payments at 10% of discretionary income.

Calculate Your Discretionary Income

After paying all necessary expenses such as housing and food costs, any money left over after paying bills is called discretionary income. Calculating it using a budgeting system like 50/30/20 strategy allows for easy estimation. Once determined, this amount can then be used as the basis for certain income driven repayment plans such as PAYE, IBR or REPAYE payments on student loans.

Use this data to create a budget and make sound financial decisions in the future. Also use it to decide whether an income-driven repayment plan would be the right solution for you; if uncertain which option would work best for you speak to either your student loan servicer or financial advisor for guidance.

Most people think of discretionary income as being any money left over after paying bills – like my wife loves Kate Spade purses (though I disagree). However, in terms of student loan repayment plans driven by income-driven repayment plans it has more specific and technical meaning.

This figure is calculated by comparing your annual income with 150% of the federal poverty guideline in your state and family size. Your monthly payment will never exceed what would be payable under a 10-year standard plan.

Prior to the FUTURES Act, those enrolled in IDR plans needed to recertify their income each year in order to remain on them. This process could be time-consuming and frustrating; now though, due to its removal by law. You still must sign up for an IDR plan but your payments will be calculated using your reported tax return from last year as opposed to having to undergo another certification process each time your income changes.

Find your previous tax returns by searching your electronic filing cabinet, tax preparer’s files or on the IRS website (if filing electronically). After doing that, it is time to calculate your Adjusted Gross Income (AGI). Line 11 on your most recent return provides this number which can then be downloaded via electronic filing cabinet, tax software or direct from IRS if filing paper returns is used as reference point.

Calculate Your Total to Repay

Income-driven repayment plans offer one effective method to lower monthly student loan payments. In general, these plans base your payment based on your income and family size; many even require you to recertify these factors each year which means your payment could change should something like getting a raise, having another child, or finding a new job arise.

Before signing on with any plan, it’s crucial that you have an understanding of how they operate and their various options available to you. Our recent WatchBlog post offers helpful guidance in selecting an ideal plan and understanding your options.

SAVE, for instance, takes into account both you and your spouse’s earnings when calculating discretionary income – which can make payments much higher compared to filing separate tax returns. Other income-driven repayment plans – like REPAYE–involve a “marriage penalty”, meaning your marital status has an adverse impact on monthly bill payment amounts. To avoid this impactful penalty altogether, select PAYE as it only uses individual income and files separate tax returns by both partners.

Income-driven repayment plans (IDR plans) can help lower payments while taking longer than standard plans to completely pay off your debts. On average, an IDR plan typically lasts 20 years while standard 10-year plans require only 10 payments for full repayment of balance. Furthermore, many IDR plans allow most or all loan balances to be forgiven after 20 or 25 years have been repaid under most plans.

SAVE plan will significantly lower payments for most borrowers and could even qualify them for $0 monthly payments under this version of REPAYE IDR that first launched in 2015.

For those eligible, the Biden administration’s Saving on a Valuable Education (SAVE) plan offers even greater relief, with millions of borrowers eligible to have their student loans forgiven after just 10 years of payments.

Calculate Your Monthly Payment

Before choosing a loan repayment plan, it’s essential that you understand how much your payments will be. A loan repayment calculator from Discover can help estimate this figure; simply enter in your total debt, interest rate, number of years desired for repayment (typically 10), and actual monthly income to ensure accurate calculations.

This calculator will also show if your monthly loan payments would be less than the interest that accumulates each month on outstanding loans. To do this, simply divide your annual interest rate by the number of days in a year, multiply that figure by your outstanding loan balance and divide by 24 to get an idea of how much interest will accrue daily – this gives a better sense of what your loan costs and whether higher payments might be feasible in future.

Obama Administration Loan Repayment Plans have introduced income-driven plans designed to assist borrowers who cannot afford their standard payments on loans, capping them at a percentage of income and cancelling any remaining balance after 25 years of repayment. These include revised version of Pay As You Earn plan that does not require financial hardship demonstration and Public Service Loan Forgiveness which cancels remaining balance for those working certain public service jobs.

Additionally, the government offers several other options that may help lower student loan costs: it has extended the repayment term of federal loans and provided refinancing opportunities for certain private loans; both can reduce monthly payments while increasing overall interest costs over time. While extending repayment terms will lower monthly payments initially, they could end up increasing overall costs later.

Prepaying your student loan could reduce its overall cost, by eliminating additional interest. This might be the ideal solution if your budget allows – the Discover loan repayment calculator can show how much your monthly payments would increase by prepaying it early.

Calculate Your Forgiveness Period

As you explore your options for repayment, it is crucial to think carefully about how long your loans could take to be repaid. Depending on the loan type and income levels, repayment terms could range from shorter or longer repayment times – both will reduce total interest paid over time.

Repayment plans offer several solutions that may lower payments by extending the length of time for your loan; there are also programs which forgive debt after a set number of years. When selecting the most suitable repayment plan for you, consider both short and long-term financial goals as well as any program requirements or restrictions.

Calculating loan forgiveness periods using the calculator available on your loan servicer’s website is quick and simple. For best results, utilize information from your most recent payroll; biweekly payees should use two weeks from each month as data points for their calculations.

Once you’ve collected this data, begin by calculating average FTEs over an eight-week alternative payroll covered period beginning with disbursement of funds and ending on the last day of payroll period (56 days later). You could also use 12-week reference periods.

Divide the average FTEs for the covered period by your selected comparison period with the lowest FTE averages; add up these calculations for each employee and multiply by the quotient to find out how many years are required before becoming eligible for loan forgiveness.

Public Service Loan Forgiveness, offered by the federal government, offers an option that could erase part or all of your debt after 120 qualifying payments. To qualify, you must work full time for either a non-profit or government organization and possess Direct Loans or consolidated federal student loans with income-driven repayment plans – an income-driven repayment calculator can help determine whether this program would work well for you. A loan forgiveness calculator available on servicer websites will assist in helping to determine if this program would work.

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