Why Income Based Student Loan Payments Can Be a Terrible Trap

What Student Loan Assistance Companies Are Not Telling You

With the surge in companies that are selling student loan assistance programs it seems their product is most commonly just filling out paperwork to enroll people in income driven repayment programs for federal student loans.

It’s an easy sale, “We Can Lower Your Payment,” is a powerful message that resonates with many people. These student loan assistance companies seem to be labeling themselves as form processors, or application assistance providers rather than student loan advisors. When facing problems with student loans, sound advice is what people need rather than just a lower payment.

Before you leap into an income driven repayment program there are some facts you must know.

Standardized Payment is Best

Mathematically, the least expensive way to eliminate a federal student loan is to make the full 10-year standardized payment. This will maintain the current interest rate of the loan, which can be very low, and eliminate the debt in the shortest payment period.

The overall cost of repaying the loan is calculated by adding together the interest charged and the amount borrowed. The higher the interest rate and the longer the repayment period, the more you will pay overall.

When faced with payment pressure on the 10-year payment plan due to other debts, the logical way to deal with getting back to affording the payment is to consider filing bankruptcy to move the other consumer debt out of the way.

This is the general approach when it comes to government owed debt. Neither the IRS or federal student loan programs consider any other financial obligations as a higher priority than their repayment.

Delaying Repayment Through Income Based Programs Has Consequences

The income driven repayment programs are designed to give struggling students some breathing room. Based on income, the payments can go to as low as zero dollars a month. On face value that seems like a really good thing.

The scary part is the facts the Department of Education shares:

“Income-driven repayment plans may lower your federal student loan payments. However, whenever you make lower payments or extend your repayment period, you will likely pay more in interest over time—sometimes significantly more. In addition, under current Internal Revenue Service (IRS) rules, you may be required to pay income tax on any amount that is forgiven if you still have a remaining balance at the end of your repayment period for an income-driven repayment plan.”Source

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An Income Based Repayment plan (IBR) does not reduce your debt. In fact it does the opposite. Interest not paid because of the low payment gets added on to the balance owed on the loan. If one day you no longer qualify for the income plans then the entire larger balance will be due.

If your income increases to the point where you no longer qualify for a reduced income based plan, your payment will return to the standard 10-year payment amount and you will have to repay the loan at the higher payment amount, within the IBR program.

“If the payment amount based on your income and family size ever increases to the point that it is higher than the amount you would have to pay under the 10-year Standard Repayment Plan, your payment will no longer be based on your income and family size. Instead, your payment will be the amount you would have had to pay under the 10-year Standard Repayment Plan. This amount will be determined based on the loan amount you owed when you first entered the IBR or Pay As You Earn plan.”Source

And while you may be paying the full 10-year payment, it may take you much longer than ten years to repay the new larger balance that was created by enrolling in the income driven plan.

Delaying the repayment of your student loans through an income based repayment program can also hurt you as the increasing balance due on your student loans are reported to the credit bureaus and negatively impact your ability to qualify for other types of credit like a car loan or mortgage.

Students are simply not paying off their loans fast enough.

Student Loan Debt Remaining

“By and large, student loan borrowers in these cohorts have not made much progress in reducing their balances. Nine-and-a-half years after leaving school, the 2005 cohort has paid down only 38 percent of its original student debt. Under a standard ten-year amortization schedule, these loans would be approaching full repayment, and only about 10 percent of the original balance would remain.”Source

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An income driven repayment plan like the Income Based Repayment, Income Contingent Repayment or Pay As You Earn is a good tool that should be strongly considered after taking a close look at a Chapter 7 bankruptcy filing in order to clear away other unsecured debts to make the regular student loan payment affordable.

In addition to making the regular standard 10-year payment affordable, a strategic bankruptcy can also help you return to a point where you can begin saving aggressively for retirement so you can avoid becoming one of the 4-in-10 people with no savings for retirement.


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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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14 thoughts on “Why Income Based Student Loan Payments Can Be a Terrible Trap”

  1. I feel like killing myself after reading this truth. I graduated GWU and now have $100K in debt. I can only afford to pay $120 per month because I only make $3K per month, and I take care of my wife and our young son. I’ll never be out of debt, my debt is getting larger by the month. I am so depressed, I feel like ending it all.

    • Income-based payments plans may not get you out of debt but they can get you a manageable monthly payment on your federal student loan debt. I know this feels overwhelming but it is absolutely not worth ending your life over. Debt is really just a math problem wrapped in emotion so let’s focus on the math and I urge you to seek immediate assistance for your suicidal thoughts. Consider calling the National Suicide Prevention Lifeline 800-273-8255. Tell me more about the type of student loans you have.

  2. As you know some Ninth Circuit bankruptcy judges think income-based repayment adds to a borrower’s hardship by delaying payment on their loans until they are well into their senior years, e.g., 65, 70 even 75 for the 25 year plan. ((th Cir. judge held a 25 year zero or very low repayment plan is not reasonable since the debtor would be in his sixties when it finally ended and would be hit with a huge tax bill. Some judges have written having that debt hanging over you creates undue emotional stress and mental hardship. Plus, when the balance is forgiven, [and will thee plans allow 25 years of zero payments and then loan forgiveness? Will they even be around in ten years?] a huge, unpayable income tax bill will be sent to a senior citizen. More and more bankruptcy judges see these plans are kicking the can down the road to the debtor’s detriment and do not require entering into one to show a good faith attempt to pay off the loans. Which is GREAT!

  3. If you pay on a private student load while going to school and some time after without ever once getting a statement, then when one is requested and they say they are in the process of transferring the accounts, so they can get me one after that is done, but still never provide one, is it legal to stop making payments until you get a statement without accruing interest and fees?

  4. What about parent loans., that was the only way my daughter was able to receive other money beside Stafford loans. I am paying 8% interest on these parent loans. The accumulated interest is higher than the original money borrowed. My daughter is a teacher and barely makes enough money to feed and cloth her child and day care.
    So all of you who say that people are lazy and don’t want to pay back student loans are so wrong. Alot just simply can’t. Most of you, I noticed are white and are able to get jobs. I am white also, but I have seen the struggle these young graduates have finding work good enough to make ends meet. So please do not be so quick to judge others. God bless the USA

  5. Hey Steve,
    In the long run, we’re all dead. Sure, what you’re saying about the pitfalls of IBR is certainly true, but human beings only get so much time on this planet. I left school with $100,000 in student loans. There is no way I could make any kind of life for my family under standard repayment. Students should not be expected to wait until they are in their 40’s to be able to buy a home or have a family. IBR is the way to go. At least you can do right by your family. Hell, you might even get lucky and die. Then the loan will be forgiven.

  6. Hi Steve,
    One thing I discussed with a CPA/EA who couldn’t figure out a way to tell me that I was wrong was that all the debt that was for forgiven after the Income based plans could only be collected to the point of insolvency. In my case, my fiance and I decided to create property agreements and estate contracts and delay getting married to put all the assets in his name so that my insolvency point was lower. My payments are minimal because our joint income is not considered and I continue to make the minimum payment. In 2028, a minimal amount of added income will be tacked on to my tax bill as forgiven debt. Can you find any holes in this method from a tax perspective?


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