Finding a job after graduation is a big accomplishment. But it can spoil you if you think about student loan payments which you will have to start making soon. It means that you are definitely not the only person who experiences this kind of worry. Millions of graduates faced such a surprise when their grace period ended. Fortunately, the government came up with something called Income-Driven Repayment (IDR).
This plan recalculates your payments according to your income instead of your loan balance. It works out great for those who are working in expensive cities as an entry-level employee. As for this plan, you will not pay the fixed amount of money every month, which will account for at least half of your paycheck. Instead, you will be paying some percentage of your discretionary income.
B: You have to apply for this plan by yourself. This will not happen automatically when your loans enter the repayment period.
For this, you will have to gather the proof of your income. If you have filed taxes last year, then you can use it. Otherwise, a pay stub or a letter from your employer will be enough. The application form can be found on StudentAid.gov.
The application itself will not take you more than ten minutes. You will have to answer several questions regarding your family size and sources of income. It is crucial to give accurate information because the Department of Education will compare your answers with the data in your tax return form. Lying on the federal form is the worst thing you can do as an adult.
After you are accepted, your servicer will calculate the new payment amount. You will see that it is much lower compared to the case with standard payment plan. But that is what it is supposed to be since the goal of this program is to ensure that you will not default on your payments at the beginning of your career.
Remember that you have to recertify your income each year. Make sure that you set a reminder for that time because otherwise, your payment will increase and the interest on your loans will capitalize.
IDR will not solve all your issues related to student loan debts. You will have to pay the increased amount of money over the lifetime of your loans due to the interest. But it provides you with some time so that you could create an emergency fund and start investing your money.
Moreover, it becomes especially useful if you are working in a non-profit organization or governmental agency because then you can use it together with Public Service Loan Forgiveness. During ten years of qualified payments, your debt will be forgiven.
Sometimes the application portal may experience some technical difficulties and you may have to apply manually by submitting a PDF version of your application. In this case, you will have to wait for several weeks before you are approved.
Check your loan servicer account after a few weeks since you have submitted the application. You should see the changed payment amount. If not, contact your servicer and ask for the status of your application.
B: Interest continues to accrue on most IDR plans even if the payment is very low.
This is the cost of this plan which allows you to make lower monthly payments. But it is a good deal for most new graduates. They can always pay more when they will have more money in their salary.
It is recommended to establish autopay for your loans when you receive this program. Almost every servicer gives you a 0.25% interest rate reduction for that.
Your financial situation will change as you will be getting promoted. Some plans which worked well for you today might not be efficient in a few years. Evaluate your repayment strategy each year. Compare your IDR payment with the standard payment plan.