Understanding Loan Repayment and Loan Forgiveness Options
The information on this page is an unofficial brief summary loan repayment options and Public Service Loan Forgiveness. For official information please visit the Department of Education’s financial aid website.
Payments Based on Your Income
Generally speaking, loan forgiveness, whether through the Public Service Loan Forgiveness (PSLF) or otherwise requires the use of one of these income-driven plans: PAYE, REPAY, or IBR.
Typically under PAYE and REPAY, the actual percentage of income you pay is in the 7% - 9% range, and under IBR the range is 12%-14%. Then after making either 120 or 240 on-time payments, any unpaid balance is forgiven. The 120-month option applies to payments made while employed full-time in a qualifying public service position (typically for an organization with a 501(c)(3) status or for a federal, state or local government. A useful chart of which option applies to you may be found on the Department of Education’s financial aid website.
The “Level-Pay” Option
With the level-pay option, you determine the number of years over which you wish to repay your debt. Then, taking into consideration the interest charged, a monthly payment amount is determined so that after making the determined number of equal-amount payments, you will have fully repaid your loan. The length of time on which level-pay options are based is up to 25 years.
The Income-Driven Payment Plan Formula
The amount of the monthly payment is either 10% or 15% of the amount of your Adjusted Gross Income that exceeds 150% of poverty level. The Department of Education’s website includes a chart to help you determine which formula applies to you.
Which Plan is Right for You?
If you are committed to Public Service Employment:
PAYE, REPAY, or IBR are the best options to consider if your total debt is fairly large compared to your annual income. If your total debt is roughly the same as, or less than, your annual income, your debt likely will be fully paid in less than 10 years using PAYE, REPAY or IBR, and there may be no unpaid debt to forgive.
If you are not committed to Public Service Employment:
If debt is relatively small, a level-pay plan may be best. The sooner you repay debt, the less amount you pay overall by reducing the amount of time you are paying interest on unpaid debt.
Borrowers may switch plans, and for some borrowers it may be financially helpful to begin repayment under an income-driven plan for a year or two, then switch to a level-pay plan that is appropriate to your circumstances. Bear in mind, that while using an income-driven plan, your monthly payment may not be sufficient to fully pay the interest for that month, and the unpaid interest will be added to the principal, resulting in a loan amount that increases, at least for a while. This is called negative amortization.
In addition to the Department of Education’s website, other websites such as www.IBRinfo.org and www.finaid.org may provide useful information and calculators that will help you make decisions that are right for you.