Pros and Cons of an Income-Sensitive Repayment Plan
If you’ve never heard of Income-Sensitive Repayment, you’re not alone. This little-known option for student loans can offer relief if you’re struggling to keep up with your loan payments.
Income-Sensitive Repayment (ISR) applies only to loans issued under the Federal Family Education Loan (FFEL) program. While it offers some great benefits, this plan also has some limitations.
In order to see how you can lower your monthly student loan bills, and whether the Income-Sensitive Repayment plan is the right solution, let’s try to answer the following questions:
What is Income-Sensitive Repayment?
If your monthly student loan bills are overwhelming, you could reduce them through the Income-Sensitive Repayment plan made available by the Office of Federal Student Aid. It caps your monthly loan payments at 4% and 25% of your gross monthly income, depending on your lender’s unique formula.
What’s unique about the Income-Sensitive Repayment plan is that it’s customized to your income and ability to pay — as long as you pay more than or equal to the interest accruing every month. You will have to reapply for the Income-Sensitive Repayment plan annually, recertifying your gross monthly income.
That being said, you typically only have this option for five years. At the five-year mark, your lender may require you to revert to a Standard Repayment Plan or switch to a graduated repayment plan to pay off your debt in the usual decade timeframe. Other lenders and loan servicers, such as FedLoan Servicing, allow you to repay your debt in 15 years.
If you’re unable to increase your payments after you’ve exhausted Income-Sensitive Repayment eligibility, you could switch to another type of income-driven repayment (IDR) plan. Income-driven plans such as Income-Based Repayment and Income-Contingent Repayment extend your repayment to 20 or 25 years, resulting in smaller monthly payments.
Because it usually only lasts five years, the Income-Sensitive Repayment plan is typically best for borrowers who need short-term relief. With it, you’ll pay less now but shell out more in the future to pay off your debt on time.
Which loans are eligible for Income-Sensitive Repayment?
One reason Income-Sensitive Repayment gets overshadowed by other income-driven plans is its limited scope: It only applies to loans made under the FFEL program. These federal loans were disbursed by private lenders and guaranteed by the government. Some lenders who disbursed FFEL loans included Sallie Mae, Citi and Wells Fargo.
Since this loan program was discontinued in July 2010, more recent borrowers can’t qualify for Income-Sensitive Repayment. If your loans were issued in 2010 or earlier, you could be eligible.
FFEL program loans include the following:
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- FFEL PLUS Loans
- FFEL Consolidation Loans
If you’re not sure whether you have FFEL loans, contact your loan servicer to find out.
What are the pros and cons of Income-Sensitive Repayment plans?
| Pros | Cons |
|---|---|
Allows FFEL borrowers to lower monthly payments without consolidating Doesn’t extend repayment to 20 to 25 years like other IDR plans Bottom Line: FFEL borrowers who expect their income to increase in the future stand to benefit | Doesn’t deliver long-term relief Allows interest to accrue faster than on a standard repayment plan No forgiveness awarded on remaining balance like other IDR plans Bottom Line: FFEL borrowers seeking extended relief might be better off consolidating and applying for another income-driven repayment plan |
The benefits
One major benefit of Income-Sensitive Repayment is that it applies specifically to FFEL loans. Most other income-driven plans exclude FFEL loans unless you consolidate them first.
Income-Sensitive Repayment may also be appealing to borrowers who want short-term relief while maintaining a 10-year deadline for paying off their loans. Other income-driven plans extend your loan terms to 20 or 25 years; while that offers you smaller monthly payments, you’ll have to deal with payments for many more years and pay more in interest over time.
Remember, you’ll have to start paying your loans off more aggressively after five years with Income-Sensitive Repayment (unless you opt for an IDR plan at that juncture). However, this plan could help borrowers who need relief now but expect their income to rise in the future.
The drawbacks
Income-Sensitive Repayment may not be so useful for borrowers who need long-term relief. If you need a longer repayment term, research income-driven plans and determine how to qualify for them. If you have FFEL loans, you’ll likely need to take on Direct Loan Consolidation before being eligible for IDR.
The Income-Sensitive Repayment plan also doesn’t offer loan forgiveness. Other income-driven plans may forgive your remaining balance after 20 or 25 years of repayment.
Another downside of Income-Sensitive Repayment is that it can cause interest to build up. If you reduce your payments, you could end up paying more interest on your FFEL loans overall.
Finally, the full details of the Income-Sensitive Repayment plan may vary somewhat from lender to lender. You’ll have to work with your loan servicer to learn the exact terms of your plan.
Which other repayment options should you consider?
As mentioned earlier, other income-driven plans are more common than Income-Sensitive Repayment. There are four income-driven plans you may qualify for:
- Revised Pay As You Earn Repayment (REPAYE) Plan
- Pay As You Earn Repayment (PAYE) Plan
- Income-based repayment (IBR) Plan
- Income-contingent repayment (ICR) Plan
To be eligible for most of these plans, you would need to consolidate your FFEL loans by taking out a Direct Consolidation Loan.
These plans lower your monthly student loan payment but they also add years to your repayment. On these plans, you could be in student debt for 20 to 25 years.
Should you get on an Income-Sensitive Repayment plan?
If FFEL loan payments burden you, an Income-Sensitive Repayment plan could help. But make sure you understand that it’s a temporary solution.
Your lender or loan servicer might only allow you to lower your monthly payments for five years. If you still need relief after this time, you’ll need to consolidate your FFEL loans and switch to another income-driven plan.
Assess your situation to figure out the best repayment option for you. If you need long-term relief, you might be better off choosing a different income-driven plan.
But if you can stick to a 10-year repayment plan, consider the Income-Sensitive option. Immediate relief on your student loan payments might be just what you need to get your finances under control and back on track.