How to afford your student loan payments on an entry-level salary

Flickr / Alper Çuğun

Student loan payments make up an increasingly large percentage of 20-somethings’ monthly expenses and are one of the biggest reasons it can seem so difficult to get ahead—even with a decent job.

And student loan payments are one expense you definitely can’t skip. Defaulting on federal student loans won’t just ruin your credit, it may lead to wage garnishment and a loss of future federal benefits, including Social Security.

If you have federal loans, however, there are a few relief options you can consider and one of those is switching to an income-driven repayment plan.

Income-driven repayment plans reduce your monthly student loan payments, making them more affordable. As the name suggests, payments are based on how much you earn each month. With an income-driven repayment plan, your monthly payment is usually 10 to 20 percent of your discretionary income—that is, your income after taxes.

This means you don’t have to worry about your monthly loan payment taking up a significant amount of your income, such as 40 or 50 percent.

While switching to an income-driven repayment plan may sound great, there are certain rules, eligibility criteria, and pitfalls that you’ll need to consider.

1. There are three options

If the idea of having an income-driven student loan repayment plan has piqued your interest, you must understand that there are different types of plans that you will need to choose from.

The most common, is an income-based repayment plan (IBR) which generally doesn’t allow your student loan payment to exceed 10 percent of your income (as long as you took out loans after July 1, 2014) with a 20- or 25-year term . If you’ve taken out loans before July 1, 2014, you can expect your payment to be 15 percent (or less) of your discretionary income, but it will never exceed what you would pay with a 10-year standard repayment plan.

With the pay-as-you-earn plan (REPAY), the idea is that your required monthly payments will start out low while your income is low and they will steadily increase over time as your income increases and you obtain higher-paying jobs. Your payment may also be based on your family size. The general repayment term for this plan is 20 years.

The income-contingent repayment plan (ICR) will allow your student loan payment to be less than 20 percent of your after-tax income for a 25-year term. This plan is ideal for individuals who intend to pursue jobs with lower paying salaries, including public service careers.

2. You have to apply

If you are having trouble making your student loan payments each month on your federal loans, you can not just ask your loan provider to switch to an income-driven plan without applying first.

Each plan has slightly different eligibility requirements, so once you carefully research each plan to determine which one works best for you, don’t forget to check the specific eligibility requirements and discuss it with your loan servicer before applying.

You can go to StudentAid.ed.gov to complete an application. The application can take a few weeks to process since your loan servicer needs to obtain documentation to confirm your income and family size.

3. You will pay more in the long-run

While switching to an income-driven repayment plan will lower your minimum payment each month, you will most likely pay more in total interest because it’s going to take you longer to pay off the loan.

To go from a 10-year term with the standard repayment plan to a 20-year term with an income-based repayment plan can cause you to pay quite a bit in interest depending on your interest rate and how much you owe.

That being said, income-driven repayment plans may be a better temporary option to help you manage your debt repayment while your income is low or if you are going through a financial hardship.

Remember though, you can always make extra payments on your federal student loans penalty-free in order to reduce the amount of interest you have to pay.