student loans based on income when considering your student loan repaymentoptions, there are a few plans based on your income that might make your loans more manageable.this is not an unusual situation for� a lot of people�in fact, almost two millionpeople are enrolled in one of these plans. so let�s take a look. three common types of these repayment plansare an income-based repayment plan or (ibr), pay as you earn repayment plan, and income-contingentrepayment plan or an (icr). an ibr is a repayment plan where your monthlyloan payment is calculated as a portion of your monthly income based on� how much youearn per year� and the state poverty level.
pay as you earn is a similar plan that offerslower payments, but it only applies to specific federal loans. and if you make a salary that�stoo high to qualify for the ibr or pay as you earn plans, the income contingent planmay be a possibility, but it also applies only to specific federal loans. there are a lot of factors that go into whetheryou may qualify for any of these plans. if you�d like to learn more, visit studentaid.ed.govfor some more detailed explanations. but to explain the basic concept behind allof these, let�s focus on ibr. now, let�s say you�ve got thirty thousanddollars in student loans. five thousand of that is subsidized and twenty five thousandis unsubsidized.
if you�re not sure what subsidized or unsubsidizedloans are, we look at this in another video. but let�s say that the interest rate youhave on both types of loans is four percent. in this scenario, on a standard ten-year repaymentplan, your monthly payment might be around three hundred five dollar per month. and if you�ve got a job that pays you anincome of twenty two thousand dollars per year, you might be having a hard time makingyour regular payments, so you apply for income-based repayment. looking at an online calculatorwith these numbers, your monthly ibr could start out at around� fifty five dollars.that�s a lot lower than that original three hundred five dollars you would be paying ona standard repayment plan.
it�s important to note one major differencebetween subsidized and unsubsidized loans in this scenario- if the loan is subsidized, and the monthlyinterest that accrues on the loan is more than your monthly ibr payment, the governmentwill pay the difference for the first three years that you�re on ibr. so, as an example, let�s say the monthlyinterest on your subsidized loans comes out to� eighty dollars a month� and your monthlypayment with ibr is fifty five� the government will pay the difference�twenty five dollars.so you�ll still have to make the monthly payment, but at least you�re not going tobe responsible for that extra twenty five
per month� and the interest on your loanwon�t accrue for the first three years. but if you�re still paying less than yourmonthly interest past that first three years it will start accruing after that. and with unsubsidized loans, if you�re payingless than your monthly interest it will start accruing from day 1. and while lower payments may help you outin the present, there are some trade-offs. for one, it will probably take a lot longerto pay off your loans. with ibr on both subsidized and unsubsidizedloans, your repayment period can be extended from ten years to twenty-five.
and this means you might end up paying a lotmore in interest if you end up staying in ibr for that entire time. looking at our example again, let�s seewhat happens over time. each year, your lender will recalculate youribr based on your income and family size so if your salary increases, generally so willyour payments. so let�s say your income increases graduallyat five percent each year for twenty-five years. over time your fifty five dollar paymentwill increase to three hundred five dollars. at the end of twenty-five years when you�vepaid off the loan, you end up paying a total of almost fifty three thousand six hundredfifty dollars - that�s your thirty thousand
dollar loan and twenty three thousand sixhundred fifty dollars in interest. by this point, you�re paying almost as much in interestas you are in principal. compare that to a ten-year repayment plan,where you only pay around six thousand four hundred fifty dollars in interest, and youcan see how different these repayment paths can be. it�s a bit like just paying the minimumpayment on your monthly credit card bill. if you�re just making the minimum payment,over time, you end up paying much more than what you originally borrowed. so what happens if you stay on ibr for thefull twenty-five year period, and still have
a balance on your loan? well in certain cases,that balance might be forgiven�though you may have to pay taxes on that amount. andby this point in your repayment, you may have paid even more than your original loan. so, hopefully you won�t have to stay onan ibr plan for too long. if you do, it�s good to know you still havethe option of paying more than your required monthly payment, and the protection of nothaving to pay the full amount you might owe on a standard repayment plan every month. and if you land a higher-paying job one year,or find more room in your budget, you can always switch back to a standard plan to payoff your loans faster.
so again, there are trade offs. the flexibilityyou may need of being able to pay less now could cost you more in the future. but ifyou don�t have other options, applying for a repayment plan that is based on your incomecan help take pressure off your monthly expenses.
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