Living with credit

Do your homework on income-based student loan plans

Kelly Dilworth

If you’re a recent grad with more debt than you can manage, you may be eligible for federal loan assistance that caps your monthly payments based on how much you take in.

Depending on the program, you could also be eligible for student loan forgiveness, which allows you to kiss your debts goodbye after 20 years of on-time payments.

But before you sign your name on the dotted line, you may want to get back into an old habit and do some homework. Take a moment to think through whether an income-based repayment plan is right for you. Capping your monthly payments will make it much less likely that you’ll default on your loan and ruin your credit. But it could also cost you substantially more over time, especially if you pay only the minimum amount due.

Federal student loan assistance could have unintended consequences

What is income-based repayment?
The federal government offers several income-based repayment plans, based in part on when you took out a federal loan.

If you just recently graduated and took out a federal loan after Oct 1. 2011 (and didn’t take out any loans before Oct. 1, 2007), you may eligible for the most recent income-based repayment plan, known as the “Pay As You Earn” plan (which also happens to be the most generous.)

Under that plan, you’ll be expected to pay a maximum of 10 percent of your discretionary income each month and you may also be eligible for loan forgiveness in as little as 10 years if you work at a nonprofit or in the public sector. (If you work in the private sector, you’ll be eligible for loan forgiveness after 20 years.)

The program is designed to help recent grads buried in debt take on lower paying jobs, without spending a lifetime paying off their student loans. It also substantially reduces the likelihood that lower income graduates will default on their debt.

But new research from the Institute for College Access and Success (TICAS) shows that income-based repayment plans can have unintended consequences for some and may not be for everyone.

Additional research from the Brooking Institution also found that the debt relief that’s paired with income-based repayment plans is extraordinarily expensive to taxpayers — and could encourage bad behavior from universities that shift their costs to students.

More expensive for some
The TICAS analysis says you could wind up paying significantly more over the life of your loan if you opt for income-based repayment.

For example, a recent grad who makes $35,000 a year and has $29,400 of debt could be on the hook for 46 percent more in current dollars ($18,800 total) if he or she chooses the “Pay As You Earn” plan, rather than the standard 10-year repayment option, according to TICAS. (Under the 10-year repayment plan, you’ll pay substantially more each month. But you’ll also pay your loan off faster and, as a result, accrue less interest.)

You may also end up paying more in other ways, said researchers. For example, with a longer repayment period, you may put off saving for retirement because you don’t have as much extra income to sock away. Or you may delay buying a home or starting a family.

Unintended consequences
Researchers at the Brookings Institution also argue that income-based repayment plans in their current form could lead to other unintended negative consequences for students and their families.

For example, students may be encouraged to borrow more than they can afford because they expect to be let off the hook after a certain period. Or, they may spend less time shopping around for colleges and choose the most-prestigious, but expensive programs.

In addition, if income-based repayment plans become more widely available (as some lawmakers have proposed), universities may have less incentive to rein in college tuition, argue researchers.

Meanwhile, the cost to taxpayers could soon become prohibitive, according to the Brookings Institution — especially if enrollment continues to spike. (According to the Wall Street Journal, enrollment in the plans has jumped by almost 40 percent in just the past six months.) Already, lawmakers are debating revisions to the federal programs that would make them less generous to students but more affordable for the federal government.

Your bottom-line
The research makes a persuasive argument that the choosing between repayment plans, like choosing between colleges, can have a significant and long-lasting impact on graduates’ financial lives.

Do the math before you choose a repayment plan for your federal loans. You can learn more about your options by visiting the U.S. Department of Education’s Federal Student Aid site or the National Consumer Law Center’s Student Loan Borrower Assistance site. also publishes a helpful calculator that can help you compare the costs of enrolling in the “Pay As You Earn” plan with the standard 10-year payment plan.

If you do decide to sign up for “Pay As You Earn,” you can enroll online by visiting

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