Should You Choose Income-based Student Loan Repayment Plan?

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Do you want to get rid of a student loan? You might be looking forward to getting an income-contingent repayment plan. This repayment plan is based on earnings and hence every student pays off the loan at different interest rates. No payments are made when your earnings are low or zero. As your income grows, your payment goes up and as your income drops, your payment goes down.

Before you sign up for any repayment plan, you should know completely about how student loans in Ireland work and how this repayment plan can affect your finances.

How does income-contingent repayment (ICR) plan work?

Standard repayment plans are not affordable for those who are on low wages. Such loans require high monthly payments, which mean you will not be able to balance between loan repayments and other expenses. ICR, on the other hand, works differently. It has nothing to do with the standard instalment rather it is tied with your monthly earnings.                       

The government has introduced this scheme so as to make repayment easier. You will pay a fixed percentage of your discretionary income every month. It can be 10% or 15% depending on when you borrowed the loan. The repayment size of your loan will be personalised to match your cost of living so that tit does not cause additional burden. Note that you cannot enrol in this plan if you have borrowed money from a private loan company.

What are the pros and cons of ICR plan?

Though this repayment plan can help you manage your loan easily, it also comes with certain drawbacks.

Pros:

Manageable monthly payments

The repayment of your loan will be based on your monthly income. It will change according to your monthly income. If your income increases, your payment will hike and if you income decreases or you lose your job, your payment will plummet or be nil. You will also have flexibility to change your repayment plan if you want to get rid of your debt earlier. The payment amount will also change when your family size changes. Your monthly repayment will be recalculated.

Forgiveness is also an option

A student loan under some circumstances can be forgiven. You will have to meet the eligibility criteria. Note that your loan will be forgiven only when you have been paying instalments on time. The forgiven balance is likely to be taxed as it is considered your income.

Cons:

It can take forever

Since you are paying dues depending on the size of your income, you are likely to settle all of the dues in 20 to 25 years. Even a standard repayment plan can take almost 10 to 15 years to settle it.

You may pay more interest

Whether it is a student loan or any other type of loan, smaller payments can be more manageable but they can cause higher interest because of longer repayment period. If you opt for ICR over standard repayment plan, you are likely to pay more interest as the repayment period may have been stretched over 10 to 15 years.

Your choices might be limited

Not all borrowers can qualify for this repayment plan. A lender will follow certain criteria to test your eligibility. You may be eligible for certain plans. Before you take out the loan, make sure that you have done enough research to know exclusive offers on student loans given by loan companies.

You may not qualify due to high income

You will be eligible for ICR plan only when your income does not go beyond the monthly repayment on a standard repayment plan. When you sign up for ICR, the loan company will calculate your income to see that whether it is more than the amount you are supposed to pay if you choose standard repayment plan, and if so, it will deny you opting for ICR option. If you are married, payments might be set after taking into account your partner’s income.

Is ICR a right plan for you?

Before you jump to any conclusion, you must consider the following factors:

Estimate your monthly payments

Before you opt for ICR plan, you should estimate your monthly payment. Use an online calculator to know your monthly payment. Do not forget to create a budget to know that you have left over after meeting all of your day-to-day expenses. Your income should be greater than outgoings because you will use your networth to clear all of your dues.

Choose what is right for you

Since this repayment plan allows you to pay back in lower instalment, it does not mean that this is the best option. You should take into account all factors before choosing any repayment plan. Financial experts suggest that you should choose a plan that does not cost you too much due to longer repayment period and that allows for manageable monthly payments.

The bottom line

ICR can allow you to take hold of your finances without compromising with monthly payments of your student loan. Do extensive research so that you choose the best option. Take advice from a financial counsellor to choose a plan that works for you best.

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