I know, it sounds crazy. But believe it or not, it is possible to have an income-driven repayment plan that offers a $0 monthly payment. But there are certain factors that need to align for you to achieve this. Let’s first take a look at the different income-driven plans currently available.
Income-Driven Repayment Plans
Income-Based Repayment (IBR): sets payments at 15% of your discretionary income. Most federal borrowers and federal loans are eligible. Forgiven after 25 years.
Income-Based Repayment (2014): sets payments at 10% of your discretionary income but is only available to federal borrowers who took out their first loan on or after July 1, 2014. Forgiven after 20 years.
Income-Contingent Repayment (ICR): sets payments at 20% of your discretionary income or the amount of your fixed monthly payments on a 12-year loan term, whichever is lower. All federal borrowers and federal loans can be eligible. Forgiven after 25 years.
Pay As You Earn (PAYE): Introduced in 2012, this plan sets payments at 10% of your discretionary income. This is only available to federal borrowers who took out their first student loan after October 1, 2007. Forgiven after 20 years.
Revised Pay As You Earn (REPAYE): sets payments at 10% of your discretionary income. All federal borrowers and federal loans can be eligible. Forgiven after 20 years if you are repaying undergraduate debt, and 25 years if you are repaying graduate debt.
Getting A $0 Monthly Payment
Basically, if the Department of Education determines that you cannot afford a monthly payment, you will end up owing $0 a month. The Department of Education will look at your family size, location, and then calculate your payment based on your Adjusted Gross Income. If you want to know how much you may end up paying you can use the Department of Education’s Student Loan Estimator.
The Catch of Having $0 Monthly Payment
I am sure you were waiting for it. In your mind, you were probably thinking—what is the catch? Say you are found eligible for a $0 monthly payment, you still need to recertify your income-driven repayment plan each year. If anything has changed from the previous year, your monthly payment will be adjusted accordingly.
Moreover, another big kicker is the fact that although you are one-month closer to forgiveness, that interest on your loans doesn’t go anywhere. This interest will continue to accrue as you save money on not having a monthly payment. One way you can reduce the amount of money interest will accrue, you can sign up for a REPAYE plan, which will only charge you half the interest.
What About Forbearance and Deferment
It is important to understand that a forbearance or a deferment is limited in comparison to an income-driven repayment plan. If you end up with a $0 payment, it could last much longer than one year if there are not any significant changes to your financial status from the previous year when you go to recertify. If you are looking to sign up for a plan, the process takes a few months to finish, but the necessary paperwork takes about ten minutes. You can do it online at studentloans.gov or ask for a physical application from your loan servicer.