Should You Prepay a Student Loan in Income-Driven Repayment?

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By Mark Kantrowitz

June 2, 2020

A parent asks whether they should pay off part of their child’s student loans as a graduation present, if the loans are in an income-driven repayment plan.

My son is in an income-driven repayment plan. As a graduation gift we told him we’d pay a certain amount of his loan up front. Are we better off paying that up front, especially now that everything is in forbearance? But of course, then he has to start paying his share.

If a borrower expects to qualify for student loan forgiveness, such as public service loan forgiveness or the 20/25-year forgiveness at the end of an income-driven repayment plan, making a prepayment will just reduce the amount of forgiveness.

However, some borrowers will pay off their student loans in an income-driven repayment plan before reaching the end of the repayment term. If so, that is not much different than being in a longer repayment plan without loan forgiveness.

  • Prepaying the debt will save some interest and cause the debt to be paid off sooner.
  • Making an extra payment does not reduce the amount of forgiveness since there is no loan forgiveness.
  • The monthly payments in an income-driven repayment plan are based on income and will not change after the parents make a lump sum payment. The benefits of the prepayment will be realized at the end of repayment, when the repayment term will be shortened.

For example, suppose a borrower owes $30,000 in student loans with a 5% interest rate, earns $35,000 a year with 2% annual cost-of-living adjustments and a 2% inflation rate. Under the income-based repayment plan, this borrower will have paid off the debt in full after 194 monthly loan payments (16 years and 2 months), paying a total of $14,674 in interest in addition to the $30,000 loan balance.

If the borrower’s parents pay off $5,000 of the debt at the start of repayment, leaving $25,000 in remaining debt, the borrower will have paid off the debt in full after 154 payments (12 years and 10 months), paying a total of $9,368 in interest in addition to the $25,000 loan balance. Thus, prepaying the debt saves $5,306 in interest and pays off the debt 3 years and 4 months sooner.

Income-Driven Repayment Calculators

These calculators below can help estimate the monthly payment and total payments.

  • Income-Contingent Repayment Calculator (ICR). Income-contingent repayment bases the monthly payment on 20% of discretionary income, which is defined as the amount by which income exceeds 100% of the poverty line, with a 25-year repayment term.
  • Income-Based Repayment Calculator (IBR). Income-based repayment bases the monthly payment on 15% of discretionary income, which is defined as the amount by which income exceeds 150% of the poverty line, with a 25-year repayment term.
  • Pay-As-You-Earn Repayment Calculator (PAYE). Pay-as-you-earn repayment bases the monthly payment on 10% of discretionary income, which is defined as the amount by which income exceeds 150% of the poverty line, with a 20-year repayment term.
  • Revised Pay-As-You-Earn Repayment Calculator (REPAYE). Revised pay-as-you-earn repayment bases the monthly payment on 10% of discretionary income, which is defined as the amount by which income exceeds 150% of the poverty line. The repayment term is 20 years for borrowers with just undergraduate loans and 25 years for borrowers with at least one graduate loan.



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