What is an Income Driven Repayment (IDR) Plan?
Updated on May 17, 2018
Income Driven Repayment (IDR) plans are designed to make your student loan debt more manageable. It reduces your monthly payment amount to an amount that is intended to be more affordable. It is based on your income and family size. The income calculation can be complex and can include Adjusted Gross Income, so be sure you know that number when considering IDR plans.
How Does an Income Driven Repayment (IDR) Plan Affect Your Credit?
IDR does not affect credit in any negative manner unless you are missing payments. People believe that IDR is a payment plan that is less-than-minimum reflecting poorly on your credit, but this is incorrect. Income Driven Repayment (IDR) plans are acceptable and allowed by law. As long as your payments are made on time, you will get the benefit of a good payment history.
Advantages of Income Driven Repayment (IDR) Plans
Income Driven Repayment (IDR) payments can help when making major purchases because it is viewed as a regular payment but is less than the default student loan plan payments. This lowers your monthly debt. Debt ratios used when applying for a mortgage or other financed purchase do not look at total debt, only monthly debt. Therefore, having a smaller payment even though you are reducing your overall debt does not count against you. The financier wants to know you are able to make the payments given your income.
The Negative About Income Driven Repayment Plans
When you enter into an Income Driven Repayment (IDR) plan, you pay less per month. This means your overall balance reduces more slowly. In some cases, this can allow you to make payments for many years without issue. Then, you may be able to ask for forgiveness from the remaining balance. Many questionable companies will not tell you this next part so be careful. If you ask for forgiveness from the remaining student loan balance, that balance can become a taxable item. This may resolve your student loan issue but create an problems with the IRS. Be sure to seek tax advice when dealing with forgiveness.Tags: federal student loans, Income Driven Repayment, Income driven repayment plans, Student Loans