When Denesia Rodgers saw her first student loan bill after she completed graduate school, she “freaked out.” Her federal loans for undergrad and graduate school, plus private loans she had taken out to fund her education would total more than $2,000 a month.
The graduate of Johns Hopkins University and Tufts University graduate school immediately called the number on her statement. “I asked what my options were besides the standard repayment,” Rodgers says. Her provider walked her through the options, and Rodgers chose the income-based repayment plan, or IBR, which provided her with the lowest monthly payment.
Now in IBR for three years, Rodgers recommends the plan to others. “My fear was that I wouldn’t be able to buy a house or a newer car. I wanted to enjoy the fruits of my labor and not be weighed down by a huge student loan debt,” she says.
In addition to IBR, there are three other income-driven repayment plans: Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE), and Income-Contingent Repayment (ICR), although having so many options may make it hard for some to determine which plan best meets their needs.
“Income-driven plans protect borrowers by allowing them to pay back their loans based on what they earn,” says Jen Mishory, executive director of Young Invincibles, a millennial-focused research and grassroots advocacy organization that has written extensively about these plans.
“They can pay an affordable amount early in their careers or in difficult financial times, and pay back faster when their incomes rise. But with so many loan repayment options, borrowers can have a tough time signing up. Simplifying the system and informing struggling borrowers about this key protection will help lower default and delinquency rates and reduce financial distress for many borrowers,” Mishory says.
More student loan borrowers are taking advantage of these plans, however. Besides lowering your monthly payment amounts, if you stay on the plan and faithfully make your monthly payments, any amount remaining after 20 or 25 years (depending on your situation) is forgiven—it’s only 10 years if you work in the nonprofit sector (including teaching, nursing, and working for state, local, or federal government). However, unless you work in the nonprofit sector, the forgiven amount is considered taxable income.
Income driven repayment plans practically eliminate the likelihood that your student loans will go into default, because the amount you pay is based on what you earn and your family size, not what you owe. Some students qualify to pay $0, but on an income-driven repayment plan, their loan is considered current. You just need to recertify your income every year. “It’s an easy process. It’s all done online. It takes less than 10 minutes,” Rodgers says.
All your pertinent tax information is accessed through your FAFSA PIN, Rodgers says, and is automatically filled in.
Because she hasn’t been constrained by a heavy debt load, Rodgers is able to enjoy the benefits that her undergraduate and graduate degrees have afforded her as a young professional. She’s gotten married, purchased a house with her husband, and had a baby. In 17 years, anything left of her student loan indebtedness will be forgiven.
For most students, income-driven repayment plans are a better option than forbearance, which capitalizes the interest (unless you pay it as it accrues), causing the principal to balloon over time. Depending on the plan, the government will pay a portion of the interest on your loan.
For more information, see the April issue of Black Enterprise magazine.