The Federal Family Education Loan (FFEL) program disbursed federal money in the form of student loans through private lenders to students attending college. Changes created by the Health Care and Education Reconciliation Act in 2010 ended the FFEL program on July 1, 2010. While no new FFEL program loans are being awarded to college or professional students, there are still many people in the United States paying these loans.
Some graduates who took out FFEL program loans might be close to paying off the principal and interest if they were on the standard payment plan, which spreads accrued interest and principal payments over 10 years. However, other graduates who accepted FFEL loans may have switched to an income-sensitive repayment (ISR) plan.
The ISR approach to adjusting monthly payments applies only to FFEL loans. It will be phased out as the final borrowers pay down their debt to the Department of Education (DOE).
How Income-Sensitive Repayment Works
Income-sensitive repayment is designed to help borrowers with lower-paying jobs afford monthly student loan payments. This prevents those struggling financially from defaulting on their loans or heading to bankruptcy court.
There are a few types of federal student loans eligible for income-sensitive repayment, including:
- Subsidized and unsubsidized Stafford loans
- FFEL PLUS loans
- FFEL consolidated loans
The William D. Ford Federal Direct Loans program, which is currently the largest program awarding student loans using federal money, is not eligible for income-sensitive repayment of any of the loans. However, there are other income-driven repayment plans that apply to direct loans, like income-based repayment (IBR).
Like other forms of income-driven repayment for federal loans, ISR is:
- Based on your monthly income
- Flexible based on how your income adjusts every year, so your monthly payments may go up or down
- Spread out in monthly payments over 10 years
The ISR calculates your FFEL or Stafford loan payments based on a range of percentages, depending on how low your income is. Your monthly payments could be between 4% and 25% of your gross monthly income. Although these percentages are adjusted to help you pay less every month, the resulting adjustment must be equal to or greater than your accrued monthly interest.
Like other income-driven plans, the income-sensitive repayment plan reduces how much you pay on your loan each month so you can afford it, but switching to this plan increases how much you will pay in interest over time. Like other income-driven plans, ISR requires you to reapply with your tax return information every year, so your income can be assessed and your monthly payments adjusted.
Unlike other income-driven plans, the income-sensitive repayment plan does not capitalize interest into the principal of the loan. This means you will pay less every month, but this plan may not be as generous as other forms of income-driven payment, like IBR.
The Pros and Cons of Income-Sensitive Repayment
For borrowers who took out FFEL or Stafford loans, ISR is a great option to help you repay your loans without suffering financial hardship.
The benefits of income-sensitive repayment include:
- The payment plan spans 10 years, so you pay less in interest than with other income-driven plans.
- The monthly payments decrease if your income decreases, based on your tax information.
The federal government offers an income-sensitive repayment calculator to help you determine if ISR will work for you.
There are some downsides to switching to an income-sensitive repayment option. These include:
- Only low-income borrowers qualify.
- If your income increases, monthly payments increase.
- You still have to pay within 10 years, like the standard repayment plan.
- You may pay more in interest over the life of the loan.
Since income-sensitive repayment is the only income-driven option for people holding FFEL program loans, you may find that your monthly payments do not adjust as much as you need them to. To take advantage of other options:
- Contact your loan servicer.
- Ask about the direct consolidation loan program.
- Consolidate your FFEL loan into a direct consolidation loan. If you have other federal student loans, you can consolidate these together into one larger loan.
Ask your loan servicer about direct loan program income-driven adjustments, like income-based repayment.
Should You Switch to Income-Sensitive Repayment?
If you think your FFEL or Stafford loan is eligible for ISR, get in touch with your loan servicer to sign up. However, the income-sensitive repayment plan may not be the best option for several reasons.
- If you have been paying down your FFEL program loan since it was disbursed on the standard repayment plan, you do not have many payments left.
- If you defaulted on your loan, you might not qualify for income-driven repayment options of any kind.
- Other repayment options give you more time to pay down your loan, like 20 years on IBR.
For borrowers on ISR who need more time to pay down their loan, consider consolidating your FFEL loan into a direct consolidation loan, and then asking about the income-based repayment or similar options. You will still pay much more in interest than you would on standard repayment, but you have more time to pay down your loan. If any of your loan principal remains after 20 years, it will be forgiven.
You can also qualify for loan forgiveness programs, like the Public Service Loan Forgiveness (PSLF) program, which forgives student loans after 10 years when you work in a career that benefits the public good. These careers can include military service, law enforcement, medical practice, or teaching. You must take several steps to manage your loans, including deferment and setting up IBR, while you work in these fields, but you could have the entirety of your loans forgiven after 10 years.