Income Sensitive Repayment: the Forgotten Student Loan Plan

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.

Educational Loan

Educational Loan 

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.

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 Educational Loan, 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.

Source: https://educationloansinindia.wordpress.com/2016/07/26/income-sensitive-repayment-the-forgotten-student-loan-plan-2/