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Are there Disadvantages to the Income Driven Repayment Plans?


Borrowers under the Income Driven Repayment Plans are required to submit annual income documentation, and as a result repayment amounts may fluctuate annually.

In addition, if the borrower's monthly payments do not cover the interest that accrues monthly on the total debt, the unpaid interest will be capitalized, i.e., added to the borrower's principal balance.  It is this new balance upon which future interest will be charged. 

Under ICR, the unpaid interest will be capitalized annually but will not exceed 10% of the loan balance at the time the borrower entered ICR. 

Under IBR, any unpaid interest will be capitalized when the borrower is no longer experiencing a partial financial hardship. 

Under PAYE, the interest will be capitalized when the borrower is no longer experiencing a partial financial hardship.  However, the capitalized interest will not exceed 10% of the borrower's loan balance at the time he/she entered PAYE.

This negative amortization as it is called may result in an increase in the outstanding balance of the debt over and above what the borrower owed at the time he/she entered the income driven repayment plan. 

Married borrowers must file their Federal taxes as "married, filing separately," in order to have the income driven loan repayment based on the borrower's income alone.  This may result in a loss of certain tax benefits. 

Income driven repayment plans result in a longer repayment period and the payment of additional accrued interest.