Tight Fisted Miser

Another Look at Income-Based Repayment for Student Loans

When discussing the College Cost Reduction and Access Act I discussed the income-based repayment plan in conjunction with the public service loan forgiveness program.  The coupling of the two is a great deal but I wanted to see how the income-based repayment plan would work when used alone.

The income-based repayment plan limits your payments to 15% of your discretionary income which is defined as your adjusted gross income minus 150% of the federal poverty level. Any debt remaining after 25 years is forgiven. I used this repayment calculator to compare the income-based repayment plan to the standard repayment plan. The income-based repayment plan didn’t compare very well when I plugged in $70,000 for the amount of debt and $40,000 for starting salary. I used the default settings for everything else in the calculator. After 25 years you would have paid $161,546 under the income-based repayment plan compared to a total of $96,667 under the standard repayment plan. Tweaking the numbers can help the income-based repayment plan but it is still going to cost more in total payments unless you have an extremely low income that doesn’t rise much over the 25 years. The major drawback of the standard repayment plan is that the payments would be $805 a month which I would unlikely be able to afford in my first job out of school. If I’m not able to qualify for the public service loan forgiveness program I think my best option would be to start with the income-based repayment plan and then convert to standard repayment as soon as I’m able to afford it.