The traditional way to repay a student loan is by making monthly payments when you stop attending school.
With traditional repayment, as with most consumer loans, your interest and principal costs are amortized. With amortized loans, payments are applied to interest costs first. As time passes, more of your payment goes to repaying principal while less goes to pay interest. Often you will pay almost as much towards interest as you pay to your principal balance.
No one can deny that these programs offer substantial benefits. A large portion of your student loan can disappear when you complete an income-driven program. But this will only happen if you enroll in the right program and complete the strict conditions.
In addition, deferment or forbearance extends the length (or term) of time to repay your loan. Thus, in a deferment or forbearance program, you have wasted valuable time because both deferment and forbearance extend the length of your loan.
In an income-driven repayment program, your loan term is for a fixed length of time (the term). For example, it might be for 120 months, 240 months, 300 months, or even longer. However, the size of your payment can change depending on what you earn. It could increase, or it could go down. Other factors will affect how much you must pay each month.
After leaving school, many people don’t earn much. During this time, these people could benefit from a small and affordable student loan payment. Even several years after their education ends, some people still don’t earn much. However, these people also continue to benefit from a modest loan payment.
In an income-driven repayment program, the amount you earn determines the amount you pay. The size of your loan is irrelevant.
In an income-driven repayment program, someone earning less than $30,000 a year could have a monthly payment between $0 and $150. If their income increases, their payments will go up. But in these programs, their payments never increase above the payment under a traditional program.
Income-driven repayment programs consistently result in savings. In addition, after completing the loan term, these programs provide total forgiveness of the loan balance.
By choosing a deferment or forbearance program, while you do pay nothing, your loan balance increases every month. The size of this increase can be substantial.
Many people choose deferment or forbearance because the student loan creditor recommends this option anytime someone says they “can’t afford to pay.” But that is precisely when an income-driven repayment program will benefit you the most.
The three benefits to choosing an income-driven repayment program while your income is low are:
Does it make sense to increase your debt when you could significantly reduce it by paying less than $4 a day? Enrolling in an income-driven repayment while your income is small allows you to take years off your repayment term.
Some people will qualify for a $0 monthly payment after leaving school. And if their income never increases, the result could be that they might pay nothing on their student loans. Nominal payments can continue if someone is disabled, chooses not to work, obtains limited or part-time employment, or enters a career that doesn’t provide much income.
In an income-driven repayment program, you make a set NUMBER of payments. The number of payments or length of time is your loan term. You are not repaying the loan balance. You are only making payments over a set term.
Therefore, the amount of your payment is irrelevant. Making even a modest payment of $100 per month (or less) counts just as much to satisfy the term requirement as making a larger payment.
The number of years you went to school determines the length of your repayment obligation. The number of payments is usually 20 years for 4 years of education, 25 years for 6 years of education, and 30 years for more than 6 years of education.
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