The Student Loan talks a lot about the various repayment
options available to student loan borrowers. With most of the new income-driven
plans, there's usually a caveat that only federal direct loan borrowers are
eligible for the plan, while Perkins and federal family education loan
borrowers are not unless they jump through some hoops.
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There is a plan, however, that's only available to FFEL loan
borrowers: income-sensitive repayment. While this plan has sort of fallen by
the wayside with the creation of income-based repayment – FFEL loans are
eligible for income-based repayment, but not the other income-driven plans – it
could actually be the best plan out there, especially if you're a borrower who
has a finely tuned budget and a payoff goal.
Here's why income-sensitive repayment might be one of our
favorite repayment plans: The borrower can often pick his or her payment
amount. That's right – you get to pick.
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The regulations are fairly vague when it comes to
income-sensitive repayment; this means that the loan holders have some wiggle
room as to how they offer this plan to their borrowers. With that said, the
Student Loan Ranger has found that most handle the plan in a similar fashion.
Let's go over some of the constants first. Regardless of
your loan holder, the plan is based on the borrower's gross monthly income, not
adjusted gross income like most other plans, from all sources. In contrast with
the other income-driven repayment plans, income-sensitive repayment is never
based on a spouse's income unless that spouse is a co-borrower on the loan.
Borrowers applying for the plan must send in proof of their gross income in the
form of tax returns, bank statements or pay stubs – most loan holders require
the most recent months' worth. From there the payment will be calculated based
on this income, to an extent.
Regulations require that borrowers applying for income-sensitive
repayment pay at least the monthly interest accruing on the loan. If the
payment is calculated lower than that, the borrower will either be placed on a
reduced payment forbearance or be counseled that income-based repayment, with
its limited interest subsidies, may be a more productive option.
Income-sensitive repayment can be used a total of five years
and does not extend the term of the loan like the other income-driven plans do.
One other aspect of this plan to be aware of is that regulations dictate that
no single required payment amount may be more than three times another payment
amount under the plan. If your chosen payment amount would result in such a
situation, the loan holder may require you to increase the payment or use a
type of forbearance.
Here's where things may vary depending on the loan holder,
but most have the following protocols. Once the borrower has established his or
her monthly gross income, he or she chooses a percentage of that income,
generally between 4 and 25 percent, to be the required payment amount. A
minimum payment of $5 is required.
So, for example, if your standard monthly payment is $500,
which is too high for your budget, and your payment under the income-based
repayment plan is $200, and your budget can handle a payment of $400, this may
be the plan for you. Just pick the percentage of your gross income that comes
closest to that $400 per month.
Note that there's no prepayment penalty for federal Education loans, so another
strategy might be to take that $200 income-based repayment plan payment and pay
extra every month. While that works for some consumers, others may not have the
financial personality to maintain that type of discipline every month, and
prefer that the higher payment be required.
Also, paying extra can result in a borrower's due date being
pushed ahead, which can make things difficult for those using an automatic
debit payment tool or service. Remember: If you choose an amount less than
interest only, you're going to also have to agree to a forbearance or
income-based repayment rather than income-sensitive repayment, which will
likely result in capitalized interest, but that result is still better than not
paying anything at all. The more you pay on your debt now, the less you'll pay
in total interest later.
If you're trying to find a way to decrease or increase your
monthly payment amount, and know exactly what you can afford, income-sensitive
repayment may be the way to help you find that perfect payment fit.
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