Income-Based Repayment Private Student Loans: Does it Exist?
Paying back student loans can be intimidating. Learn how income-based repayment can help.
Income-based repayment options can be a godsend for federal loan borrowers who are having difficulty making their loan payments. But what can private loan borrowers do in the same situation?
We'll answer that question in the article below, and offer some alternatives to income-based repayment options that private loan borrowers can take advantage of.
What are Income-Driven Repayment Plans?
Federal student loan payments have several income-driven repayment (IDR) options. This is one of the main reasons students should maximize their federal loans before relying on private loans.
Federal loans also come with more loan forgiveness programs and longer forbearance and deferment options for students who can no longer afford their loan payments.
When you apply for an IDR plan, you have to provide your income, family size and place of residence. Then, the federal government student aid website will calculate your monthly payment based on the information provided. There are several types of IDR plans, each with its own payment calculation. After 20 or 25 years of payments on one of the IDR plans, the remaining balance will be forgiven.
Here is a list of the available IDR plans:
- Income-based repayment
- Income-contingent repayment
- Income-sensitive repayment
- Pay as you earn plan
- Revised pay as you earn
President Biden recently announced a new IDR plan where payments will only be 5% of any income past $33,000 a year. The exact details of this new plan have yet to be announced and may not be available for several more months.
Private Student Loans and Income-Based Repayment Plans
Unfortunately, private student loan companies do not offer income-based repayment options for borrowers. Once you choose a repayment term and finalize the loan, the monthly payment will be fixed.
Private loans and forgiveness programs
Some borrowers with private loans may still qualify for certain loan repayment programs (LRP). They will not be eligible for broad programs like Public Service Loan Forgiveness (PSLF), but they may qualify for niche alternatives.
These LRPs are mostly available to healthcare professionals like nurses, doctors, pharmacists, physical therapists and mental health counselors. Lawyers can also find these types of programs.
LRPs often require working in a specific community focused on low-income or underserved individuals. Borrowers must usually work there for a few years to qualify. Some programs let borrowers extend their initial contract to have most or all of their debt forgiven.
How to Lower Payments for Private Student Loans
One of the only ways to lower your monthly payment is to refinance your student loans with another lender. Refinancing is the process of moving your current loan into a new loan with a different lender.
When you refinance with another lender, you can choose a new repayment term. When you refinance into a longer repayment term, it will often result in a lower monthly payment. If you’re lucky, you may also qualify for a lower interest rate as well.
For example, let’s say you owe $50,000 in loans with a 12% interest rate and a 10-year term. If you refinance to an 8% interest rate and a 15-year term, your monthly payment will be $240 less.
Unfortunately, choosing a longer repayment term may mean that you will pay more in total interest over the life of the loan, even if you have a lower monthly payment.
For example, let’s say you owe $50,000 with a 12% interest rate and a 10-year loan term. Your monthly payment is $717.35.
If you refinance to a 10% interest rate and a 15-year term, your monthly payment will be $537.30. Over the life of the loan, you will pay $10,632 more in total interest.
For some student loan borrowers, paying more interest may be worth the lower payments and added flexibility. Plus, borrowers can always make extra payments if they can afford it. Private lenders do not charge prepayment fees, so there is no penalty for paying off your loans faster.
The process of refinancing your student loans is similar to taking them out. You must provide your contact and financial details, including your income. The lender will run a credit check and if your credit score is below their threshold, then you may not qualify for a refinance.
However, you can often add a cosigner, an adult who is qualified to take out a loan. The cosigner will agree to take over your education loan if you default. Adding a cosigner may be necessary if you are a recent grad, unemployed, have a poor credit score or have no credit history.
Even if you do have good credit, including a cosigner can make qualifying for a lower interest rate easier. This can save you a lot of money in the long run.
Apply for forbearance
If you’re struggling to make payments and need a temporary pause, you can apply for loan forbearance. Loan forbearance will let you pause payments for a certain period of time.
Each lender has their own forbearance policy, with some as short as one month. Other lenders offer up to 12 months of forbearance.
The downside to forbearance is that interest will still accrue during this time. Depending on the lender’s policies, that interest may be added to the loan balance after forbearance is over. This is known as capitalization.
If the interest is capitalized, then your total balance will increase - which means your monthly payments could also increase. You should only choose forbearance if you don’t qualify for refinancing or only need a temporary break.
Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Conscious Coins.