There are multiple options for repaying student loans, from the standard plan to extended plans, and even plans that are based on or contingent upon income. Choosing which one will work best for you can be a confusing and daunting process. The hardest part is choosing between two different plans that are very similar. This is the case with the Income Based Repayment Plan and the Income Contingent Repayment plan for student loans. At first glance the two plans are virtually the same, but a closer look reveals some pretty major differences.
How Are They The Same?
The Income Based plan and the Income Contingent plan are the same in many ways. With both plans the monthly payment is based on the amount of discretionary income earned. The payment is evaluated each year to see if it needs to be raised or lowered based on changes in income or family size. Both options are paid over 25 years with the balance forgiven at the end, and both offer a reduction in interest.
What is the Difference?
Under the Income Contingent Repayment plan, there is no requirement to show partial financial hardship. This means that if you do not qualify for the Income Based Plan because you do not meet this requirement, you may still be eligible for the income contingent plan. The monthly payment under the contingent plan is generally 20% of discretionary income, whereas with the Income Based plan generally sets the monthly payment at 15% of discretionary income. Also, while there is still a reduction in interest with both plans, the reduction is much more generous with the Income Based plan than with the Income Contingent Repayment Plan.
So Which One should You Choose?
The short answer is that if you qualify for the Income Based Plan, and you are certain you need and want a plan that is dependent on income, go for it. The reduction in interest and lower percentage for payments could be worth it. If, however, you do not meet the partial financial hardship requirement, go for the Income Contingent Plan. If you need a monthly payment that fluctuates with income, that will be your next option.
What about Other Options?
It is wise to compare and contrast any income reliant plan with those that are not reliant on income. The fact is that those plans that take longer to pay out, such as the Income Contingent Repayment plan, can actually cost more in the long term. However, if the lower monthly payment is a necessity in order to make payments, then the extra interest paid over time may also be a necessity.
In the end, the repayment plan for student loans that is best for you will depend on a number of factors that vary between individuals and circumstances. The plan that works best in the beginning may not be the plan that works best after a few years. Circumstances can change, including income and family size, and an Income Contingent Repayment Plan for student loans may be worth looking into after some of these changes occur.