Income-based student loan repayment plans

Sometimes you may not make enough money to cover your student loan payments. This video helps you better understand income-based student loan repayment plans to determine if they’re your best option.

Transcript
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INCOME-BASED STUDENT
LOAN REPAYMENT PLANS

When considering your
student loan repayment options,
PAYCHECK

there are a few plans
based on your income

that might make your
loans more manageable.

This is not an unusual situation
for… a lot of people—

in fact, almost two million people
are enrolled in one of these plans.
2 MILLION

So let’s take a look.

Three common types
of these repayment plans

are an Income-Based Repayment Plan
INCOME-BASED REPAYMENT (IBR)

or (IBR),

Pay as You Earn Repayment Plan,
PAY AS YOU EARN

and Income-Contingent Repayment Plan
INCOME-CONTINGENT REPAYMENT (ICR)
or an (ICR).

An IBR is a repayment plan where
your monthly loan payment
INCOME-BASED REPAYMENT

is calculated as a portion
of your monthly income
PAYCHECK, MONTHLY INCOME
IBR PAYMENT

based on… how much you earn per year…

and the state poverty level.

Pay as you earn is a similar
plan that offers lower payments,
PAY AS YOU EARN

but it only applies
to specific federal loans.
PAYCHECK, MONTHLY INCOME
LOAN PAYMENT

And if you make
a salary that’s too high

to qualify for the IBR

or Pay as You Earn plans,

the Income Contingent
Plan may be a possibility,
INCOME-CONTINGENT
PAYCHECK, MONTHLY INCOME

but it also applies only
to specific federal loans.
LOAN PAYMENT

There are a lot of factors
that go into whether you may

qualify for any of these plans.

If you’d like to learn more,

visit studentaid.ed.gov
STUDENTAID.ED.GOV

for some more detailed explanations.

But to explain the basic
concept behind all of these,

let’s focus on IBR.
INCOME-BASED REPAYMENT (IBR)

Now, let’s say you’ve got thirty
thousand dollars in student loans.
$30,000

Five thousand of that is subsidized
$5,000 PRINCIPAL
SUBSIDIZED

and twenty five thousand
is unsubsidized.
$25,000 PRINCIPAL
UNSUBSIDIZED

But let’s say that the
interest rate you have

on both types
of loans is four percent.
@4% INTEREST

In this scenario,

on a standard ten-year repayment plan,
STANDARD 10-YEAR PLAN

your monthly payment might be around
$305/MO.
0, 10 YEARS

three hundred five dollar per month.

And if you’ve got a job
that pays you an income

of twenty two
thousand dollars per year,
INCOME, $22,000

you might be having a hard
time making your regular payments,

so you apply for
income-based repayment.
IBR APPLICATION

Looking at an online
calculator with these numbers,
IBR PAYMENT CALCULATOR
CURRENT SALARY, LOAN

your monthly IBR
could start out at around…
CALCULATE, $22,000, $55/MO
STUDENTAID.ED.GOV

fifty-five dollars.

That’s a lot lower than that original
IBR, $55/MO

three hundred five
dollars you would be paying
$305/MO, STANDARD PLAN

on a standard repayment plan.

It’s important to note one
major difference between subsidized
SUBSIDIZED, UNSUBSIDIZED
INTEREST, PRINCIPAL

and unsubsidized
loans in this scenario-

if the loan is subsidized,
SUBSIDIZED (MONTHLY PAYMENT)
PRINCIPAL, INTEREST

and the monthly interest
that accrues on the loan

is more than your monthly IBR payment,
IBR

the government will pay the difference

for the first three years
that you’re on IBR.

So, as an example,
$80 INTEREST

let’s say the monthly interest on
your subsidized loans comes out to…

eighty dollars a month…

and your monthly
payment with IBR is fifty five…
$55 IBR PAYMENT

the government will pay
the difference—twenty-five dollars.
80, -55, $25

So you’ll still have
to make the monthly payment,

but at least you’re
not going to be responsible

for that extra twenty five per month…

and the interest on your loan
won’t accrue for the first three years.
SUBSIDIZED, INTEREST, PRINCIPAL
1, 2, 3, YEAR

But if you’re still paying
less than your monthly interest
4 YEAR,

past that first three years
it will start accruing after that.
5 YEAR

And with unsubsidized loans,
INTEREST, PAYMENT, PRINCIPAL
UNSUBSIDIZED

if you’re paying less
than your monthly interest

it will start accruing from day 1.

And while lower payments
may help you out in the present,

there are some trade-offs.

For one, it will probably take
a lot longer to pay off your loans.

With IBR on both subsidized
and unsubsidized loans,

your repayment period can be extended

from ten years to twenty-five.

And this means you might
end up paying a lot more in interest
10 YEARS IBR, 25 YEARS IBR

if you end up staying
in IBR for that entire time.
A LOT MORE

Looking at our example again,

let’s see what happens over time.
INCOME, $22,000

Each year, your lender
will recalculate your IBR
PAYCHECK

based on your income and family size.

So if your salary increases,
INCOME, $30,000

generally so will your payments.

So let’s say your
income increases gradually

at five percent each year
for twenty-five years.
$55/MO, $305/MO

Over time your
fifty-five dollar payment
INCOME, PAYMENTS, 25 YEARS

will increase to three
hundred five dollars.

At the end of twenty-five years
when you’ve paid off the loan,
$55/MO, IBR, $23,650 TOTAL INTEREST
$53,650 TOTAL

you end up paying
a total of almost fifty three

thousand six hundred fifty dollars -

that’s your thirty
thousand dollar loan

and twenty three thousand
six hundred fifty dollars in interest.

By this point, you’re paying
almost as much in interest

as you are in principal.

Compare that to a
ten-year repayment plan,
STANDARD REPAYMENT PLAN
$305/MO

where you only pay around
$6,450 TOTAL INTEREST

six thousand four hundred
fifty dollars in interest,
$36,450 TOTAL

and you can see how different
these repayment paths can be.

It’s a bit like just
paying the minimum
MINIMUM PAYMENT

payment on your
monthly credit card bill.

If you’re just making the
minimum payment, over time,

you end up paying much more
than what you originally borrowed.

So what happens if you stay on IBR
0, 25 YEARS

for the full twenty-five year period,

and still have a balance on your loan?

Well in certain cases,
that balance might be forgiven—
GOV

though you may have
to pay taxes on that amount.
TAXES + WHAT YOU ALREADY PAID

And by this point in your repayment,
$30,000 ORIGINAL LOAN

you may have paid even
more than your original loan.

So, hopefully you won’t have
to stay on an IBR plan for too long.
IBR PAYMENT

If you do, it’s good to know
you still have the option
ADDITIONAL PAYMENTS

of paying more than
your required monthly payment,

and the protection of not having
to pay the full amount you might owe
THE FULL AMOUNT ON STANDARD
10-YEAR PAYMENTS

on a standard repayment
plan every month.

And if you land a
higher-paying job one year,

or find more room in your budget,
10-YEAR STANDARD PLAN

you can always
switch back to a standard

plan to pay off your loans faster.

So again, there are trade offs.
The flexibility you may need

of being able to pay less now
could cost you more in the future.

But if you don’t have other options,

applying for a repayment
plan that is based on your income

can help take pressure
off your monthly expenses.

BETTER MONEY HABITS®
BANK OF AMERICA WITH KHAN ACADEMY
BETTERMONEYHABITS.COM

THE MATERIAL PROVIDED ON THIS VIDEO IS FOR INFORMATIONAL USE ONLY AND IS NOTE INTENDED FOR FINANCIAL OR INVESTMENT ADVICE. BANK OF AMERICA AND/OR ITS AFFILIATES ASSUME NO LIABILITY FOR ANY LOSS OR DAMAGES RESULTING FROM ONE’S RELIANCE ON THE MATERIAL PROVIDED. PLEASE ALSO NOTE THAT SUCH MATERIAL IS NOT UPDATED REGULARLY AND THAT SOME OF THE INFORMATION MAY NOT THEREFORE BE CURRENT. CONSULT WITH YOUR OWN FINANCIAL PROFESSIONAL WHEN MAKING DECISIONS REGARDING YOUR FINANCIAL OR INVESTMENT MANAGEMENT. ©2017 BANK OF AMERICA CORPORATION.

INCOME-BASED STUDENT
LOAN REPAYMENT PLANS

When considering your
student loan repayment options,
PAYCHECK

there are a few plans
based on your income

that might make your
loans more manageable.

This is not an unusual situation
for… a lot of people—

in fact, almost two million people
are enrolled in one of these plans.
2 MILLION

So let’s take a look.

Three common types
of these repayment plans

are an Income-Based Repayment Plan
INCOME-BASED REPAYMENT (IBR)

or (IBR),

Pay as You Earn Repayment Plan,
PAY AS YOU EARN

and Income-Contingent Repayment Plan
INCOME-CONTINGENT REPAYMENT (ICR)
or an (ICR).

An IBR is a repayment plan where
your monthly loan payment
INCOME-BASED REPAYMENT

is calculated as a portion
of your monthly income
PAYCHECK, MONTHLY INCOME
IBR PAYMENT

based on… how much you earn per year…

and the state poverty level.

Pay as you earn is a similar
plan that offers lower payments,
PAY AS YOU EARN

but it only applies
to specific federal loans.
PAYCHECK, MONTHLY INCOME
LOAN PAYMENT

And if you make
a salary that’s too high

to qualify for the IBR

or Pay as You Earn plans,

the Income Contingent
Plan may be a possibility,
INCOME-CONTINGENT
PAYCHECK, MONTHLY INCOME

but it also applies only
to specific federal loans.
LOAN PAYMENT

There are a lot of factors
that go into whether you may

qualify for any of these plans.

If you’d like to learn more,

visit studentaid.ed.gov
STUDENTAID.ED.GOV

for some more detailed explanations.

But to explain the basic
concept behind all of these,

let’s focus on IBR.
INCOME-BASED REPAYMENT (IBR)

Now, let’s say you’ve got thirty
thousand dollars in student loans.
$30,000

Five thousand of that is subsidized
$5,000 PRINCIPAL
SUBSIDIZED

and twenty five thousand
is unsubsidized.
$25,000 PRINCIPAL
UNSUBSIDIZED

But let’s say that the
interest rate you have

on both types
of loans is four percent.
@4% INTEREST

In this scenario,

on a standard ten-year repayment plan,
STANDARD 10-YEAR PLAN

your monthly payment might be around
$305/MO.
0, 10 YEARS

three hundred five dollar per month.

And if you’ve got a job
that pays you an income

of twenty two
thousand dollars per year,
INCOME, $22,000

you might be having a hard
time making your regular payments,

so you apply for
income-based repayment.
IBR APPLICATION

Looking at an online
calculator with these numbers,
IBR PAYMENT CALCULATOR
CURRENT SALARY, LOAN

your monthly IBR
could start out at around…
CALCULATE, $22,000, $55/MO
STUDENTAID.ED.GOV

fifty-five dollars.

That’s a lot lower than that original
IBR, $55/MO

three hundred five
dollars you would be paying
$305/MO, STANDARD PLAN

on a standard repayment plan.

It’s important to note one
major difference between subsidized
SUBSIDIZED, UNSUBSIDIZED
INTEREST, PRINCIPAL

and unsubsidized
loans in this scenario-

if the loan is subsidized,
SUBSIDIZED (MONTHLY PAYMENT)
PRINCIPAL, INTEREST

and the monthly interest
that accrues on the loan

is more than your monthly IBR payment,
IBR

the government will pay the difference

for the first three years
that you’re on IBR.

So, as an example,
$80 INTEREST

let’s say the monthly interest on
your subsidized loans comes out to…

eighty dollars a month…

and your monthly
payment with IBR is fifty five…
$55 IBR PAYMENT

the government will pay
the difference—twenty-five dollars.
80, -55, $25

So you’ll still have
to make the monthly payment,

but at least you’re
not going to be responsible

for that extra twenty five per month…

and the interest on your loan
won’t accrue for the first three years.
SUBSIDIZED, INTEREST, PRINCIPAL
1, 2, 3, YEAR

But if you’re still paying
less than your monthly interest
4 YEAR,

past that first three years
it will start accruing after that.
5 YEAR

And with unsubsidized loans,
INTEREST, PAYMENT, PRINCIPAL
UNSUBSIDIZED

if you’re paying less
than your monthly interest

it will start accruing from day 1.

And while lower payments
may help you out in the present,

there are some trade-offs.

For one, it will probably take
a lot longer to pay off your loans.

With IBR on both subsidized
and unsubsidized loans,

your repayment period can be extended

from ten years to twenty-five.

And this means you might
end up paying a lot more in interest
10 YEARS IBR, 25 YEARS IBR

if you end up staying
in IBR for that entire time.
A LOT MORE

Looking at our example again,

let’s see what happens over time.
INCOME, $22,000

Each year, your lender
will recalculate your IBR
PAYCHECK

based on your income and family size.

So if your salary increases,
INCOME, $30,000

generally so will your payments.

So let’s say your
income increases gradually

at five percent each year
for twenty-five years.
$55/MO, $305/MO

Over time your
fifty-five dollar payment
INCOME, PAYMENTS, 25 YEARS

will increase to three
hundred five dollars.

At the end of twenty-five years
when you’ve paid off the loan,
$55/MO, IBR, $23,650 TOTAL INTEREST
$53,650 TOTAL

you end up paying
a total of almost fifty three

thousand six hundred fifty dollars -

that’s your thirty
thousand dollar loan

and twenty three thousand
six hundred fifty dollars in interest.

By this point, you’re paying
almost as much in interest

as you are in principal.

Compare that to a
ten-year repayment plan,
STANDARD REPAYMENT PLAN
$305/MO

where you only pay around
$6,450 TOTAL INTEREST

six thousand four hundred
fifty dollars in interest,
$36,450 TOTAL

and you can see how different
these repayment paths can be.

It’s a bit like just
paying the minimum
MINIMUM PAYMENT

payment on your
monthly credit card bill.

If you’re just making the
minimum payment, over time,

you end up paying much more
than what you originally borrowed.

So what happens if you stay on IBR
0, 25 YEARS

for the full twenty-five year period,

and still have a balance on your loan?

Well in certain cases,
that balance might be forgiven—
GOV

though you may have
to pay taxes on that amount.
TAXES + WHAT YOU ALREADY PAID

And by this point in your repayment,
$30,000 ORIGINAL LOAN

you may have paid even
more than your original loan.

So, hopefully you won’t have
to stay on an IBR plan for too long.
IBR PAYMENT

If you do, it’s good to know
you still have the option
ADDITIONAL PAYMENTS

of paying more than
your required monthly payment,

and the protection of not having
to pay the full amount you might owe
THE FULL AMOUNT ON STANDARD
10-YEAR PAYMENTS

on a standard repayment
plan every month.

And if you land a
higher-paying job one year,

or find more room in your budget,
10-YEAR STANDARD PLAN

you can always
switch back to a standard

plan to pay off your loans faster.

So again, there are trade offs.
The flexibility you may need

of being able to pay less now
could cost you more in the future.

But if you don’t have other options,

applying for a repayment
plan that is based on your income

can help take pressure
off your monthly expenses.

BETTER MONEY HABITS®
BANK OF AMERICA WITH KHAN ACADEMY
BETTERMONEYHABITS.COM

THE MATERIAL PROVIDED ON THIS VIDEO IS FOR INFORMATIONAL USE ONLY AND IS NOTE INTENDED FOR FINANCIAL OR INVESTMENT ADVICE. BANK OF AMERICA AND/OR ITS AFFILIATES ASSUME NO LIABILITY FOR ANY LOSS OR DAMAGES RESULTING FROM ONE’S RELIANCE ON THE MATERIAL PROVIDED. PLEASE ALSO NOTE THAT SUCH MATERIAL IS NOT UPDATED REGULARLY AND THAT SOME OF THE INFORMATION MAY NOT THEREFORE BE CURRENT. CONSULT WITH YOUR OWN FINANCIAL PROFESSIONAL WHEN MAKING DECISIONS REGARDING YOUR FINANCIAL OR INVESTMENT MANAGEMENT. ©2017 BANK OF AMERICA CORPORATION.

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