Student loans can be a huge financial burden when you first start working. This is especially true if you are self-employed. As if the challenges of self-employment weren’t enough, you have student loan payments on top of it!
Paying off your student loans is just one of the cornerstones of managing your money after graduation, so let’s start by reviewing the programs that can help.
Fortunately, there are several payment plans for low income earning holders of federal student loans. While we explain the details of the various plans, the simplest way to discover which one is best for you is the use the repayment estimator offered by the U.S. Department of Education. It will tell you the best option.
Income Based Repayment Plan
If you are on an Income-Based Repayment (IBR) plan, which is one the most common income-driven repayment plans, on your federal student loans such as Direct and FFEL loans, you have a reprieve. IBR plans cap your monthly payments based on your income and family size. This doesn’t apply if the loan was made to your parents though.
The first step is determining your income. Whether you qualify for an IBR plan depends on your income relative to 150% of the poverty level. The rule regarding eligibility is that if it takes more than 15% of the amount you earn above 150% of the poverty level to pay off the loan on a 10-year payment plan, you qualify.
In summary, if you earn less than 150% of the poverty level, your payment will be $0. If you earn more, it’ll be capped at 15% of whatever you earn. After 25 years of qualifying payments, your outstanding loan balance will be forgiven.
Income Contingent Repayment Plan
The Income Contingent Repayment (ICR) Plan is similar to and predates the IBR Plan. Both forgive the loans after 25 years. The big difference is that ICR can only be used with the Federal Direct Loan Program, and Parent PLUS Loans.
The monthly payment requirement is higher with the bar at 20% of your income versus 15%.
Pay As Your Earn (PAYE) Plan
Another popular repayment plan is known as Pay As You Earn (PAYE) and is similar to IBR but applies only to Federal Direct loans made to the students. To be eligible, you must have taken out your first federal student loan after September 30th, 2007 and at least on after September 30, 2011.
The requirements for this program are less strict, with the bar set at 10% of your income above the 150% of poverty level (instead of 15% for IBR). Another significant difference is that any outstanding balance on your loan after 20 years will be forgiven.
Revised Pay As You Earn (REPAYE) Plan
Is your head spinning yet?
This fourth and newest program, announced June 2014, is an expansion of the PAYE plan. It permits Direct Loan borrowers to cap monthly student loan payments to 10% of monthly discretionary income with no date requirements on the loans. The payments are capped at 10% of your income above the 150% of poverty level and if your payment doesn’t cover interest, the government will cover it for the first three years.
One last point to remember about all of these programs, should you qualify, is that if your payment doesn’t cover the interest, it will continue to accrue and capitalize into the loan (unless paid by the government). If it doesn’t cover the principal, it will also continue to accrue. On Subsidized Stafford Loans, the government will pay the interest for the first three years of IBR. After three years, and on other loans, the interest will be added to your loan.
Don’t forget, at tax-time you can save money by deducting your student loan interest you paid up to $2,500 and you don’t even need to know how to deduct it. TurboTax will ask you simple questions about you and give you the tax deductions you are eligible for.
Hopefully we have shared information about student loans that will help put your mind at ease as you run your own business.