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The Long-Term Cost of Income-Driven Repayment

By U.S. News & World Report

Choosing an income-driven repayment plan can make your student loan payments manageable if your income is too low to support a standard repayment schedule. But income-driven repayment plans require longer repayment than a standard plan. Payment amounts change over time depending on your income, which can affect the total cost of your loan.

[Read: Best Student Loan Refinance Lenders.]

Lower Monthly Payments Can Cost More

Income-driven repayment plans can make student loan payments more affordable by adjusting monthly payments based on a borrower’s income rather than the balance. These plans can significantly reduce payments for borrowers with limited income, while making it easier to avoid delinquency or default.

However, lower monthly payments typically translate to longer repayment periods.

“Income-driven repayment plans can be a lifeline for borrowers who are struggling financially, as they are intended to make monthly payments more affordable (because they are based on income rather than the loan balance),” says Leslie H. Tayne, finance and debt expert and founder of Tayne Law Group. “The flipside is that the consumer could end up paying more over the life of the loan.”

A lower payment could be the right choice if you need room in your budget, but the long-term cost depends on how long the repayment lasts and whether you qualify for loan forgiveness.

[Read: Best Private Student Loans.]

How Older Income-Driven Plans Compare With RAP

Not all income-driven repayment plans work the same way. Older plans, such as Income-Based Repayment or Pay As You Earn are different than the Repayment Assistance Plan for new borrowers. These differences affect how interest accrues, the length of repayment and how much you pay over time.

Typically, IBR and PAYE set payments based on discretionary income with loan forgiveness after 20 or 25 years of qualifying payments. Borrowers with limited income may have low required payments, sometimes so low that they do not cover the interest accrued each month.

With IBR and PAYE, unpaid interest can accumulate and cause balances to grow over time, says Stacey MacPhetres, senior director of college finance for Bright Horizons. She says the new RAP offers an unpaid interest waiver that prevents balance growth, but extends the forgiveness timeline to 30 years.

Under RAP, borrowers may pay more over the life of the loan despite stronger interest protections.

[Read: Best Student Loans for Graduate School]

What A Low Income-Driven Repayment Can Look Like

Income-driven repayment can make your monthly bill more manageable, but the numbers vary depending on your income, loan balance and plan.

Compare the payments and costs for a borrower with $40,000 in federal student loans at a 6% interest rate, earning $70,000 annually with no dependents. Under a standard 15-year repayment plan for a $40,000 balance, the borrower would pay about $337 per month and about $60,000 over the life of the loan. With IBR or PAYE, the monthly payment would be $388, with forgiveness after 20 years, for a total cost of about $93,000.

Income-driven repayment plans that stretch payments out 25 years or more can cost significantly more. For example, an Income-Contingent Repayment plan would have a payment of $390 with forgiveness after 25 years for a total of about $117,000. RAP payments would be $350 for 30 years and cost about $126,000.

For this borrower, the standard repayment plan has the lowest monthly payment, the shortest payment period and the lowest total cost. But a borrower with $50,000 in annual income could fare better with income-driven repayment. For a borrower with $50,000 in annual income, all income-driven repayment plans except ICR have lower monthly payments and total costs than the standard repayment plan.

However, these calculations assume the same income across the full repayment period of 15 to 30 years, depending on the plan. If you have an income-driven repayment plan, your monthly payment will adjust with your income as you recertify it annually. You could see significant savings in monthly payments and projected total loan cost when you’re new in your career and likely to have a lower income, but the benefits of income-driven repayment may be negated as your income increases.

Income-driven repayment plans will be streamlined in July. The only plan for new borrowers will be RAP, and existing borrowers in ICR or PAYE will need to transition to either IBR or RAP by July 1, 2028.

The right plan depends on your current income and what you expect to earn during the repayment period.

“For borrowers with tight household budgets, it can be helpful to think of lower monthly payments as temporary breathing room instead of a permanent solution,” says Tayne. “If and when your financial situation improves, consider contributing more funding to your loan balance, or channel windfalls (such as a tax return) to your loans. This will help you not only reduce your balance, but limit the cost of interest, too.”

More from U.S. News

How Parents Can Prepare Their Kids for Student Loans

Student Loan Forgiveness ‘Tax Bomb’: Why You Could Owe $10K or More

Can I Transfer My Parent PLUS Loans to My Student?

The Long-Term Cost of Income-Driven Repayment originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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