With most private student loans, monthly payments are determined without considering how much the borrower earns. That means someone making $100,000 a year could have the same monthly payment as someone making half as much, assuming they have the same annual percentage rate (APR).
The advent of income-based private student loans means borrowers have a new option that offers much more flexibility. Read on to find out how income-based student loans work and how they compare to traditional private loans.
In this article:
- What are income-based student loans?
- Income-based private loans vs. federal loans
- Income-based private loans vs. traditional private loans
- Example of how Edly’s income-based repayment works
- Other borrowing options for income-based repayment
What are income-based student loans?
Like their name, income-based private loans calculate the monthly payment as a percentage of the borrower’s income. This can make repayment easier for borrowers because payments will scale up or down based on their income.
As of April 2022, Edly is the only private lender that offers income-based repayment (IBR) plans. If you qualify for an income-based loan with Edly, payments start four months after graduation, as long as the borrower is earning at least $30,000.
Payments end when the borrower has either made 60 or 84 payments, paid back 2.25 times the loan amount, or hit a 23% APR cap.
Income-based private loans vs. federal loans
Federal student loans also come with income-driven repayment (IDR) options, where the terms are either 20 or 25 years depending on the loan type. The main difference with a federal IDR plan is that the remaining loan balance will be forgiven after the term is completed, or sooner if you work for a nonprofit or government organization.
Borrowers with federal loans don’t choose a repayment option until they’re required to start making payments. They can also change their payment plan at any time.
With a private income-based loan like Edly’s, a borrower agrees when they sign the initial loan contract to make payments based on their level of income. Or, if they want to repay the loan with a lump sum, they must agree to a fixed—usually high—APR.
Income-based private loans vs. traditional private loans
While Edly’s income-based loan option is a private loan, it differs from a traditional private loan.
Edly does not require a minimum credit score or require a cosigner. However, if you have an adverse credit history—such as collections or defaults—it may affect your eligibility.
You can easily see if you qualify for an Edly loan by filling out a short prequalification form. You’ll have to input your school, major, degree, GPA, expected graduation year, desired loan amount, and your current year in school.
At this time, Edly loans are available only to undergraduate juniors and seniors, as well as graduate students at specific programs and schools.
Edly’s loan limits depend on several different factors, with a $5,000 minimum and a $30,000 lifetime maximum. The most borrowers can qualify for in a single academic year is $20,000, plus $10,000 for a summer session.
Many private lenders let borrowers take out the annual cost of attendance, which can be much higher.
Many traditional private student loans offer a six-month grace period after graduation before repayment begins. But students who become unemployed have to apply for deferment, and the eligibility requirements vary depending on the lender.
With an Edly income-based loan, deferment is automatic for unemployed borrowers or those earning below $30,000. Once a borrower’s annual income reaches at least $30,000, payments kick in.
Edly’s repayment maximum is whichever the borrower reaches first: 2.25 times the amount borrowed, 23% APR, or 60 or 84 payments (any payments deferred while a borrower is under the income threshold do not count).
For the first 12 months, the monthly payment is $200, regardless of the loan amount. The monthly amount of the remaining 48 payments is then calculated as a percentage of income. Similar to other lenders, Edly charges a late fee of $25 or 6% of the late payment, whichever is lower.
Traditional private lenders calculate payments based on the initial borrowed amount plus a fixed or variable APR.
Example of how Edly’s income-based repayment works
The amount you earn after graduation has a huge impact on how much you pay each month and over the life of the loan.
If you sign up for an income-based repayment option through Edly, your payment will depend on your income. Edly borrowers must earn at least $30,000 a year for payments to begin.
If you plan to enter a high-earning field, an Edly loan may not be the best choice for you because you’ll end up handing over a much larger portion of your income. Edly verifies borrower income annually through tax returns.
Edly repayment example
The examples below are for someone with the 60-month version of Edly’s income-based student loan.
|Initial loan amount||$10,000||$10,000|
|Annual income-share percentage||7%||7%|
|Monthly payment, first 12 months||$200||$200|
|Remaining monthly payments||$379.17 for 48 months||$233.33 for 48 months|
|Total number of payments||60||60|
|Total repayment amount||$20,600.16||$13,600|
Edly repayment vs. traditional private loan repayment
The most you will repay with traditional private loans is the amount you borrowed plus interest. With Edly, your total repayment could be much higher.
|Edly repayment, $65,000 income||Traditional private loan, any income|
|Initial loan amount||$10,000||$10,000|
|Monthly payment||$200 for the first 12 months$379.17 for 48 months||$198|
|Total repayment period||60 months||60 months|
*Edly’s monthly repayment is based on a 7% annual income-share percentage. The traditional private loan uses a 7% APR.
In this example, the Edly borrower paid back more than twice what they initially borrowed because they hit 60 payments—the maximum number of payments required—before reaching a 23% APR or 2.25 times the loan amount.
Other borrowing options for income-based repayment
As previously mentioned, federal student loans offer a variety of income-driven repayment plans.
If you’re seeking a private student loan, an income-share agreement is similar to an income-based student loan. Monthly payments are based on your current income, and the term is decided when you sign the agreement. Most income-share agreements last between two and 10 years.
During that time, you will pay a portion of your salary every month. The downside of an ISA is that if you’re a higher earner, you may wind up paying much more than you initially borrowed. And because an income-share agreement is not technically a loan, you can’t change or refinance the terms later on.
Students can find income-share agreements directly through their college or with a third-party company. Purdue University and the University of Utah are some of the most prominent colleges that currently offer income-share agreements.
Not every student will qualify for an income-share agreement. They’re most often given to students in STEM fields, so liberal arts majors will find a harder time qualifying for an ISA.