Parts 1 and 2 covered balance-driven repayment plans.  These are the backbone of the repayment options, and should be familiar to anybody who has figured out the repayments of another type of loan like a mortgage.
In recent years, the Federal Government has expanded the options of so-called income-driven repayment plans.  (We can’t call it the more normal-sounding income-based repayment plan, because income-based repayment plan is a specific repayment plan.  Income-driven repayment is the umbrella term to cover all the income-driven options.)
There are technically six types of income-driven repayment plans
  • Income-based repayment (IBR) (old borrowers)
  • Income-based repayment (IBR) (new borrowers)
  • Pay as you earn (PAYE)
  • Revised pay as you earn (REPAYE)
  • Income-contingent repayment (ICR)
  • Income-sensitive repayment (ISR)

However, ICR and ISR are rarely used for most borrowers, and everybody who is eligible for IBR for new borrowers can benefit from the PAYE or REPAYE plan.

So, how do these plans work? Well, the main idea is that these repayment plans make borrowers pay some percentage of their discretionary income each month towards their loans, regardless of how much money they owe.  So long as you meet certain requirements, the amount you pay on $50,000 worth of debt is the same as what you would pay on $250,000.

How do you calculate discretionary income? Your discretionary income is the amount of money you have left after subtracting 150% of the poverty guideline for your household size.  The poverty guidelines for 2018 are:

  • $12,140 (1 person household)
  • $16,460 (2 person household)
  • $20,780 (3 person household)
  • $25,100 (4 person household)
  • $29,420 (5 person household)

Which makes 150% of these guidelines:

  • $18,210 (1 person household)
  • $24,690 (2 person household)
  • $31,170 (3 person household)
  • $37,650 (4 person household)
  • $44,130 (5 person household)

So, let’s say you are on a payment plan that requires you to pay 10% of your discretionary income towards  your loans.  If you make $50,000 per year and are single, your discretionary income is $50,000 – $18,210, or $31,790.  10% of that is $3,179.  If you have to pay $3,179 over the course of the year, that makes your monthly payment $265 ($3,179 divided by 12 is $265).  So, no matter how much you owe, your monthly payment under a 10% income-driven repayment plan will be $265.

Okay, now that we have that building block in place, we will spend the next few parts taking a deeper dive and comparing the income-driven repayment plans.

These plans can differ in numerous ways:

1. Percentage of discretionary income owed
2. Eligible loans
3. Eligible borrowers
4. Forgiveness opportunities
5. How the plan handles spousal income
6. Interest benefits
We will take a look at each one of the plans in turn.

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