Income sensitive repayment is an option for some student loans that adjusts monthly payments in response to the borrower’s income. This can assist borrowers who might otherwise experience hardship with large payments, especially when they have just graduated and may not be making very much money. Applicants generally must submit proof of income to qualify for this plan, and can select the percentage of their income they would like to put towards student loan payments. Lenders may require that people pay at least the accrued interest on the loan each month, to avoid making the loan grow over time.
This is one among several options borrowers can use to manage their repayment. With income sensitive repayment, the term of the loan is still the same, which means payments at the end of the life of the loan may get much larger to compensate for low payments at the start. Paying less at the beginning also means paying more in interest over time, an important consideration for students thinking about this option. It can help to use a repayment calculator to compare how much will be paid in total over the life of the loan with different options.
Borrowers who do not make very much money will have relatively small payments under an income sensitive repayment plan. If they experience a sudden change in their circumstances, they can voluntarily pay more than the minimum, or ask for recertification to reflect an even lower monthly income. It is important to be aware that not all student loans qualify for an income sensitive repayment option. Some may have set monthly payments that don’t change even if borrowers have low income.
The documentation for an income sensitive repayment plan can illustrate how much people will pay each month, and should provide information about how to qualify each year. There may be a limit on the number of years loan payments can be adjusted in this way. Generally, if people had low payments for the entire life of the loan, they wouldn’t be able to pay it off by the time it matured.
Another option to consider is graduated payments. These start out small after graduation and grow with time under the assumption that students will be making more and may find it easier to make larger payments after several years. Lenders may also consider an extension, where the life of the loan is made longer, to accommodate unusual financial circumstances.