While we all require student loans to pay for our education expenditures, it is not an easy task to repay the loan. Forgiveness or discharge of student loans is available only in special circumstances such as bankruptcy, physical or mental impairment, death or due to an individual’s decision of joining social or public sector, military services, teaching services et cetera. Along with these important pre- requisites, there are strict conditions imposed on the eligibility for a forgiveness program. It therefore is impossible for an individual to rely on such programs to dissolve his/ her student debt. What helps an individual in such a case is a suitable repayment plan that can adjust according to an individual’s income, family size and financial situation. There are several repayment plans an individual can select from to repay his/ her student loans. One such plan is Income- Contingent Repayment Plan.
Income- Contingent Repayment Plan
Under the Income- Contingent Repayment Plan , payments to be made towards debt are calculated every year using family size, gross income of the borrower and total amount of one’s direct loans as the basis. Since the repayment is based on a borrower’s income, therefore, the repayment amount changes along with any change in the income. The borrower is supposed to make loan repayments for a time period of 25 years, after which the remaining amount of student debt in the name of the borrower is forgiven by the federal government. Monthly payment amount is the least of twenty percent of the discretionary income or a repayment amount (adjusted to the income) equal to what would be paid with a repayment plan of fixed payment amount for 12 years.
Eligibility for Income- Contingent Repayment Plan
The income based repayment plan is available on Direct Unsubsidized and Subsidized loans and consolidated unsubsidized and subsidized Federal Stafford Loans. All PLUS loans of students also qualify for this program along with Direct consolidation loans. Income- contingent repayment plan does not demand any initial income eligibility specifications.
How to apply for Income- Contingent Repayment Plan
The borrower needs to submit an offline or online Income- driven repayment plan request application that can be obtained from one’s loan servicer. The borrower can choose from the various income- driven repayment plans that best suit one’s need. Having chosen the plan, one needs to provide some income related documents. Document showing Adjusted Gross Income (AGI) can serve this purpose if the borrower has filed for an income tax return in past two years and the income on the most recent income tax return is the similar to current income. Some other income information documents can be used in the absence of these conditions.
Benefits of Income- Contingent Repayment Plan
This repayment plan offers two main advantages other than helping an individual regain control over one’s finances. Firstly, the plan generally reduces the monthly payment as compared to a standard repayment plan. This might help a borrower to realize some savings and manage his budget more effectively. Secondly, once the borrower has made the required qualifying payments for twenty- five years, if there is still some debt remaining, it is eliminated by the federal government and the individual is no longer liable to pay it off. Along with these benefits, such repayment plans help the economy as a whole by lowering the instances of default and strengthening the economy.
Limitations of Income- Contingent Repayment Plan
Income- contingent repayment plan mainly contains two limitations. In spite of reducing the monthly payment made towards debt, income- contingent repayment plan might raise the total amount of repayment made towards debt when compared to the standard ten year repayment plan. This happens because the time frame of repayment increases to twenty- five years and hence, even though monthly payments are low, the aggregate comes out to be much higher.
Also, one the borrower has made qualifying payment towards debt for twenty- five years, the remaining debt is forgiven. What comes as a shock to the borrower is the tax implication that follows. Amount of discharge of student loan is considered to be taxable income. The borrower needs to prove his/ her hardship in paying the tax bill in order to get it reduced by the agency imposing tax. This is sometimes referred to as government’s way of giving from one hand and taking away from the other. Also, since the repayment amount in income- contingent plan is based on the income, therefore, with an increase in income, it sometimes rises above the amount that a borrower would have paid with a ten year standard repayment plan.
Like each repayment plan, Income- contingent repayment plan has its own set of advantages and disadvantages. Therefore, it becomes important for the borrower to analyse the terms and conditions before availing the benefit of discharge of student loan. With the option of switching between different loan repayment plans available, an individual can think of changing his/ her repayment plan if he/ she think there is a better plan that can be availed. Such switching also plays an important role in avoiding default on one’s loans. Apparently, there is a multitude of benefits that these plan offer; the borrower just needs good amount of knowledge and dedication to use them.