Student Loans: Income-Based vs Contingent vs Sensitive

Student loans can be hard to repay once you graduate. It isn't easy to find decently paying jobs when you have just graduated. Usually, you have to start at a low-rung position and work your way up. The current economic climate isn't making it any easier. The income-orientated student loan repayment programs try to address this, allowing you to repay the loan within the limits of your current earnings. These include income-based, income-contingent and income-sensitive student loan repayment programs. While they all have similarities and they all aim toward the same goal, they do have several notable differences.

Income-Based Repayment Plan

This is a fairly new loan repayment program. Under this program, the monthly payments are capped based on your monthly income, your family size and your state of residence. It can be used to repay all Stafford loans, graduate PLUS loans and consolidation loans that don't include Parent PLUS loans. It cannot be used to repay loans that are currently in default. 

You can figure out whether you qualify for the income-based repayment plan by using the IBR calculator, which is available at the Department of Education's federal student aid website. If the number it calculates is lower than your current monthly payments, you are eligible. Your income, family size and state of residence are used to calculate your new monthly payments. Those payments are adjusted at the beginning of every year.

If you are repaying your loan under the repayment program and you still haven't repaid it after 25 years, anything you may owe is automatically forgiven. However, this does not apply if you are late on any of your payments or if you pay less than what you owe.

Income-Contingent Repayment Plan

You can use this plan to repay Stafford loans, graduate PLUS loans and consolidation loans that were issued under the Direct Loan program. In other words, this applies to the loans that were issued directly by the federal government. Under the income-contingent repayment plan, your monthly payments are calculated every month based on your adjusted gross income, family size and the total value of your loans. The payments are capped at either 20 percent of your monthly discretionary income or your current month payments times your income percentage factor, whichever is the lowest. The monthly discretionary income is your monthly income minus your monthly living expenses. The income percentage factor is the percentage that's based on your annual income and marital status.

If your monthly payments aren't large enough to cover the interest accumulated on your loans, the unpaid amount will be added to the loan principal (capitalized) at the end of the year. However, capitalization can't exceed 10 percent of the amount you owed when you began repaying the loan.

As with income-based programs, you have to repay the loan for only 25 years. Anything that you still owe past that point is forgiven. However, you will have to pay taxes on the forgiven portion of the loan.

Income-Sensitive Repayment Plan

While income-contingent repayment plans apply to Direct Loans, this plan applies to loans that were issued through the Federal Family Education Loan (FEEL) program. In other words, this applies to loans that were issued by private lenders and backed by the federal government. Because the lenders issue the loans, they get some leeway in deciding how their income-sensitive repayment plans will work. However, they do have some common features.

Under all income-sensitive repayment plans, your monthly payments are pegged at a certain percentage of your monthly income (anywhere between 4 and 25 percent). For many lenders, this will be a 2/3 income-to-debt ratio. You must reapply for this program every year, and in most cases, you can reapply for no more than 10 years in a row.


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