Federal Stafford Loan Repayment Options – Income-Based Repayment

We are continuing with our weekly blogs about Stafford Loan Repayment. Fourth up, we have Income-Based Repayment. This repayment option is available to borrowers who took out loans prior to 2008 and face serious financial hardships.

With this plan, the borrower can make monthly payments that are 15% of his/her discretionary income, which is the difference between the borrower’s adjusted gross income and 150% of the federal poverty guideline. With this plan, the typical monthly payments will be lower than with the Standard Repayment, and will not exceed the amount that a person would pay if they had chosen the Standard Repayment plan.

After 25 years in repayment, any remaining principal or interest will be forgiven. However, the borrower may have to pay income tax on any amount that is forgiven. With Income-Based Repayment, borrowers who work in public service may qualify for loan forgiveness after 10 years.

The advantages of Income-Based Repayment are that borrowers will have smaller payments if their incomes are low, and some of the loan maybe forgiven after 25 years of repayment. However, the disadvantage of this repayment option is that borrowers will keep accruing interest because they are making smaller monthly payments. In addition, they will have to submit yearly documentation regarding income and family size to demonstrate their continued eligibility for this repayment plan. And finally, the borrowers will have to pay taxes on the loan amount that may be forgiven after 25 years.

For more information, please visit http://studentaid.ed.gov/repay-loans/understand/plans or contact your financial aid counselor.