Income-Based Repayment

The lenders usually lend the money based on the credit history of the borrower. This makes the credit score an important factor to decide whether the borrower should be given the loan or not or how much loan should be given. In some exceptional cases, it might not be possible to lend money to the borrower based on his credit score. Like in case of a new borrower, who doesn't have a credit history might find it hard to borrow funds. For this reason, Income-Based Repayments are used to lend the money to the borrower.

Who can apply for the income-Based repayments?

You must be able to manage the debt properly in order to get over with it smoothly over the entire life of the debt. One of the options to manage the debt is to plan the repayments based on the inflow of income that is received by the borrower. The income-based payments plan is best suited for lower instalments for the repayments. To qualify for this plan, the borrower must have a 'partial financial hardship'. A partial financial hardship can be explained as, excess of standard 10 years monthly payments of a borrowed sum, over the 15 per cent of the income that is received. Thus, this is a plan which is basically for those student loan borrowers who have got more debts to pay then their actual income.

How is the interest treated in the Income-Based repayments plan?

Though the instalments of the repayments are limited to the income of the borrower, the reduction in the repayment amount does not reduce the interest element in it and this makes it a little loss making transaction since with the increase in the instalments, duration of the loan repayment will also increase and ultimately it will include more interest. If the loan is subsidized than the interest will not accrue till the repayment gets started.

Effect of Income-Based Repayment loan over the Stafford Loans:

One can choose for Income-Income Repayment plan while in a Stafford loan. The Stafford loan is preferred for the grace period and low interest instalments. In case of opting Income-Based Repayment loan in a Stafford loan, the borrower has to apply two months before the end of the grace period in order to give time for the application processing.

Effects of default:

In case of opting for Income-Based Repayment loan, care should be taken that there is no default by the borrower. It will result in to penalties or late fees charges but the borrower still remains eligible for the plan. Moreover, it will also get reported to the credit rating agencies.

Income-Based Repayment plans have been a boon to those who are unable to manage the debts or their income is not enough to cover the repayment liability of the debt.