Income-driven repayment has been a difference between federal and private student loans for a long time. In the past, private borrowers couldn’t link their monthly payments to their income, but federal borrowers could. Income-Based Repayment
The difference between federal and private student loans is starting to fade.
Rhode Island Student Loan Authority (RISLA), a nonprofit student loan lender in Rhode Island, now offers an income-based repayment (IBR) option for anyone who refinances their student loans with the organisation. The idea takes a lot from the “old” IBR framework that was developed in 2009. It lets you change your payments when your income is low and forgives your debt after decades of payments.
It is a tiny but important change in a private lending sector that has always focused on fixed monthly payments and quicker payoff dates. The question is whether other lenders will follow suit and if borrowers should embrace them if they do, as federal student loan laws continue to alter. Income-Based Repayment
How RISLA’s Income-Based Repayment Works
Under RISLA’s IBR program, borrowers who refinance their student loans can cap their monthly payments at 15% of their discretionary income. That payment will never exceed what the borrower would owe under a standard repayment plan, and the minimum payment is $10 per month. Income-Based Repayment
If a loan has a cosigner, both incomes will be used to calculate the payment amount.
Interest continues to accrue during IBR periods, but there is an important safeguard: unpaid interest does not capitalise (meaning it does not get added to the loan balance) until the borrower reaches the end of the IBR repayment period.
Borrowers who remain in the program for 25 years of qualifying payments can receive forgiveness for any remaining balance. Periods of forbearance or deferment do not count toward that total unless the borrower is actively making IBR payments.
RISLA also says that borrowers who enrol in IBR remain eligible for its career-based loan forgiveness programs, including nursing rewards and internship forgiveness. That combination is unusual in the private market, as most other lenders don’t offer “forgiveness” programs. Income-Based Repayment
Why Private Lenders Are Experimenting Now
Private lenders have long avoided income-based repayment because of its uncertainty. Fixed payments make loans easier to price, easier to securitise, and easier to explain to investors.
But the student loan market has changed. Rising balances, uneven wage growth, and the normalisation of income-driven repayment in the federal system have reshaped borrower expectations. Many borrowers now see payment flexibility as a baseline feature, not a luxury.
From a lender’s perspective, IBR can serve as a risk-management tool. A borrower who can reduce payments during a job loss or income dip may be less likely to default altogether. Lower default rates can offset the cost of longer repayment periods and potential forgiveness. Income-Based Repayment
RISLA’s nonprofit status may also make the math easier. The organization does not answer to shareholders in the same way large for-profit lenders do, giving it more room to prioritise borrowers’ stability over short-term returns.
What Does The Math Look Like?
Income-based repayment lowers monthly payments, but it almost always raises the total amount paid over time. Time is a huge factor in student loan repayment.
Consider a simplified example:
- Loan balance: $60,000
- Interest rate: 6%
- Borrower discretionary income: $50,000
Standard repayment (15 years):
A borrower on a 15-year fixed plan would pay roughly $505 per month. Over 15 years, total payments would come to about $91,000, with the loan paid off in full. Shorter repayment plans repay even less due to less interest accruing.
Income-based repayment (25 years):
At 15% of discretionary income, the monthly payment would be about $343 per month initially, but payments could rise over time (in fact, the lender is betting on it). Over 25 years, the borrower could easily pay $100,000 in total, depending on income growth, before any remaining balance is forgiven.
It’s also important to realize that forgiven balances are taxable – and would be subject to the student loan tax bomb. Income-Based Repayment
The borrower does benefit from flexibility and protection against unaffordable payments. The lender benefits from extended interest collection and lower default risk. The tradeoff is time.
What This Means For Borrowers
For borrowers with volatile incomes (early-career professionals, gig workers, or those entering lower-paying public service roles), private IBR could reduce financial strain without forcing them back into the federal system.
However, those with volatile incomes may find it difficult to be approved for a refinance into an IBR programme. There are multiple student loan refinance lenders, and they all have different underwriting criteria. if there’s a repayment risk, they may not offer IBR anyway.
Refinancing into a private student loan with this IBR plan also means giving up federal protections such as Public Service Loan Forgiveness and any future federally mandated payment pauses.
While it’s premature to declare this a trend, we will closely monitor RISLA’s action. If default rates fall and borrower satisfaction rises, other lenders may test similar options, possibly with stricter eligibility rules or higher interest rates to offset the risk. Income-Based Repayment
Frequently Asked Questions
What is income-based repayment, and how is it being applied to private student loans for the first time?
Income-based repayment bases your monthly loan payment as a percentage of your income. That has traditionally been reserved for federal student loans, but RISLA is introducing it to private student loans.
How does RISLA’s new income-based repayment option for private student loans work?
RISLA’s new income-based repayment option would cap your student loan payment at 15% of your discretionary income. Income-Based Repayment
What makes income-based repayment for private student loans different from federal income-driven repayment plans?
There are some variations between federal IDR plans and RISLA’s. For example, RISLA uses 15% of discretionary income, while the new IBR uses 10%, and RAP uses adjusted gross income.
What are the potential benefits and risks for borrowers using income-based repayment on private student loans?
The big benefit of income-based repayment is that monthly student loan payments could be lower and capped as a percentage of your income. The downside is that total repayment may increase over time simply because the repayment period is extended. Income-Based Repayment