Student Debt Resource

# 10: Comparing IDR Plans

/ Student Debt E-book

**Below are a few examples that compare IDR plans. All of these examples use the loan simulator. Unless otherwise noted in the example, we assume that your income will grow 5% each year, that your family size will remain the same during the life of the loan, and that the poverty guidelines will increase based on the Congressional Budget Office’s estimation of inflation. In the event income changes, so will monthly payment amounts under the IDR plans will also change. **

**Example A.**

Paul is single with $100,000 in FFEL Grad Plus Loans. He has a household size of 1. What will Paul pay under the various payment plans?

- Standard: $1,110 per month for 120 months with a total loan cost of $133,225.
- Graduated: $635-$1905 for 120 months with a total loan cost of $142,120.
- Extended (fixed payments): $644 per month for 300 months with a total loan cost of $193,290.
- Extended (graduated payments): $500-$970 per month for 300 months with a total loan cost of $210,289.
- IBR (at 15 percent): $586 per month for 300 months with a total loan cost of $175,800.

**Reminder: **Since Paul has FFEL loans, he cannot participate in the PAYE, REPAYE and ICR plans.

As you can see from the example above, Paul benefits greatly from the IBR plan, as he makes half the monthly payment he would be required to make under the Standard Repayment Plan. Though he pays approximately $30,000 more over the life of the loan under the IBR plan than he would under the Standard plan, he has 64 more months to pay it.

**Example B**.

Paul marries and converts his $100,000 in FFEL loans to a Direct Consolidation Loan. Paul’s wife makes $50,000 a year and has no federal student debt of her own. Paul and his wife file their taxes as married filing separately. What would Paul pay on his loans under the various repayment plans?

- Standard: Paul pays $600 per month for 360 months with a total loan cost of $215,838.

Graduated: Paul pays $500-$818 per month for 360 months with a total loan cost of $232,868. *Since Paul consolidated his loans, his Standard and Graduated Repayment Plan periods extend from 10 years to 30 years.*

- Extended (fixed payments): Paul pays $644 per month for 300 months with a total loan cost of $193,290.
- Extended (graduated payments): Paul pays $500-$970 per month for 300 months with a total loan cost of $210,289.
- REPAYE: Paul pays $755 – $ 1,376 per month for 141 months with a total loan cost of $141,643.
- PAYE: Paul pays $339 – $1,051 per month for 240 months with a total loan cost of $153,433.
- IBR (at fifteen percent): Paul pays $508 – $1,110per month for 206 months for a total loan cost of $172,927.
- ICR: Paul pays $813 – $1,087 per month for 144 months for a total loan cost of $142,829.

If Paul pays his new consolidation loan under the PAYE plan, he saves as much as $300 per month while making only 240 monthly payments and paying $62,000 less over the life of the loan, versus going into the Standard Repayment Plan (30 years) where Paul would pay $600 per month for 360 months.

Notice that Paul pays more per month under the REPAYE plan since his wife’s income is counted toward his AGI, even though Paul filed his taxes as “married separately.” In this case, the IBR plan might be better for Paul (or at least cheaper), even though the IBR plan requires fifteen percent of discretionary income; this is assuming Paul is not a new borrower under the plan, versus the REPAYE plan which only requires ten percent.

**Example C**.

Before entering repayment on his new Direct Consolidation Loan, Paul and his wife have twins. Paul’s wife decides to stay at home for a while, making Paul’s household AGI $65,000. As reminder, Paul has $100,000 in Direct Consolidation Loans at six percent. What will Paul pay on his loans under each of the repayment plans?

- Standard: Paul pays $600 per month for 360 months with a total loan cost of $215,838.
- Graduated: Paul pays $500-$818 per month for 360 months with a total loan cost of $232,868.
*Since Paul consolidated his loans, his Standard and Graduated Repayment Plan periods extend from 10 years to 30 years.* - Extended (fixed payments): Paul pays $644 per month for 300 months with a total loan cost of $193,290.
- Extended (graduated payments): Paul pays $500-$970 per month for 300 months with a total loan cost of $210,289.
- REPAYE: Paul pays $234 – $1,205 per month for 300 months with a total loan cost of $186,028.
- PAYE: Paul pays $234 – $887 per month for 240 months for a total loan cost of $121,776.
- IBR (at 15 percent): Paul pays $351 – $1,110 per month for 264 months with a total loan cost of $203,739.
- ICR: $673 – $1,111 per month for 161 months for a total loan cost of $151,040.

Paul pays $350 less monthly initially under the PAYE plan, as compared to the Standard Repayment Plan (thirty years) and makes 120 fewer payments. Under the REPAYE plan, Paul saves the same amount of money, and makes 60 less payments than he would make under the Standard Repayment Plan (thirty years).

This example also demonstrates how household size can affect monthly payments. As a general rule, an increase in household size will decrease monthly payments under an IDR plan, whereas a decrease in household size will increase monthly payments. This is because every person added to a household decreases discretionary income by about $6,000 for the IBR, PAYE and REPAYE plans and by about $4,000 for the ICR plan. Since Paul had twins, his household size went from two to four, and his discretionary income decreased by roughly $8,000-$12,000.

**Let’s discuss a few more examples. **

**Example D.**

Deborah graduates from law school with $61,500 in Direct Unsubsidized Loans at four percent, and $65,000 in Direct Grad PLUS Loans at six percent. However, Deborah cannot secure employment. What will Deborah pay under the various repayment plans?

- Standard: $1,343 per month for 120 months with a total loan cost of $161,213.
- Graduated: $760-$2,281 per month for 120 months with a total loan cost of $170,174.
- Extended (fixed payments): $742 per month for 300 months with a total loan cost of $222,464.
- Extended (graduated payments): $530-$1,204 per month for 300 months with a total loan cost of $242,970.
- REPAYE: $0 per month for 300 months with a total loan cost of $0.
- PAYE: $0 per month for 240 months with a total loan cost of $0.
- IBR (at 15 percent): $0 per month for 300 months with a total loan cost of $0.
- ICR: $0 per month for 300 months with a total loan cost of $0.

The example above was meant to emphasize that since IDR plans tie your monthly payments to your income, if you have no income, or very limited income, you pay $0 per month, and it will still qualify as an on-time monthly payment.

**Example E.**

David has three children. For his three children, David has $350,000 in Parent PLUS Loans which he has consolidated into a Direct Consolidation Loan after July 1, 2006, with an interest rate of 6%. David has an AGI of $65,000. What will David pay under the various repayment plans?

- Standard: David pays $2,098 per month for 360 months with a total loan cost of $755,434.
- Graduated: David pays $1,750 – $2,862 per month for 360 months for a total loan cost of $815,038.
- Extended (fixed payments): $2,255 per month for 300 months with a total loan cost of $676,516.
- Extended (graduated payments): $1,750 – $3,394 per month for 300 months with a total loan cost of $511,131.
- ICR: $813 to $3,017 per month for 300 months with a total loan cost of $539,269.
*Since David consolidated Parent PLUS loans, he cannot access the PAYE, REPAYE, or IBR plans.*

**Note**: Since David consolidated Parent Plus loans, he cannot access the PAYE, REPAYE, or IBR plans.

By consolidating Parent PLUS Loans, David initially saves a lot of money on his monthly payments using the ICR plan. Without consolidation, David would be required to pay $2,098 under the Standard Repayment Plan for 360 months. This monthly payment would require David to spend almost 100 percent of his after-tax income on his student loans. By consolidating, David initially saves over $1,200 per month on his monthly loan payments.

**Example F.**

Dana has an AGI of $85,000 a year and has $55,000 in Direct PLUS Loans at six percent. She is single with no children or dependent persons in her home. How much will Dana pay on her loans under the various repayment plans?

- Standard: Dana pays $611 a month for 120 months with a total loan cost of $73,274.
- Graduated: Dana pays $349 – $1,048 a month for 120 months for a total loan cost of $78,166.
- Extended (fixed payments): Dana pays $354 a month for 300 months with a total loan cost of $106,310.
- Extended (graduated payments): Dana pays $275 to $533 a month for 300 months for a total loan cost of $115,659.
- REPAYE: Dana pays $558 to $865 a month for a total of 104 months with a total loan cost of $72,061.
- PAYE: Dana pays $558 – $611 per month for 123 months with a total loan cost of $73,940.
- IBR (at 15 percent): Dana does not qualify for this IBR plan due to not possessing the required partial financial hardship.
- ICR: Dana pays $617 to $676 per month for 113 months for a total loan cost of $72,313.

This example demonstrates that while IDR plans do not save Dana much money (versus being in balance based plans), given her higher income and lower loan balance. However, the example does demonstrate how valuable payment plans without partial financial hardships can be. As you can see, Dana cannot qualify for the IBR plan due to her lack of a partial financial hardship, but can still access ICR and REPAYE (as neither plan require a partial financial hardship).

**Note**: Payment plans with partial financial hardships require the capitalization of all accrued interest, once the borrower no longer has a partial financial hardship. (Remember that you are not required to leave the plan at that point and are not automatically removed from it.) If your income puts you on the cusp of being disqualified for a partial financial hardship, you may soon have your accrued interest capitalized. In those cases, it might be worthwhile to consider entering into either the ICR or REPAYE plans from the start, since the plans do not require you to have a partial financial hardship.