Understanding Income Driven Repayment Plans for Student Loans

Student loans can feel like a heavy burden, especially when you’re just starting out in your career. For many, the standard repayment plan can be tough to manage. If you’re struggling to make those monthly payments, it might be time to consider an income-driven repayment (IDR) plan. These plans are designed to make student loan payments more affordable by basing them on your income and family size, rather than a fixed amount. Let’s break down what income-driven repayment plans are and how they can help you manage your student loan debt.

What Are Income Driven Repayment Plans?

Income-driven repayment plans adjust your monthly student loan payments according to your income, making them more manageable if you’re not earning a lot. The goal is to ensure that your payments are affordable relative to your financial situation. There are five main types of IDR plans: Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE), Income-Based Repayment (IBR),  Saving on a Valuable Education (SAVE), and Income-Contingent Repayment (ICR). Each plan has its own eligibility criteria and terms, so it’s important to choose the one that best fits your needs.

1. Pay As You Earn (PAYE)

PAYE caps your monthly payments at 10% of your discretionary income, similar to REPAYE. However, unlike REPAYE, PAYE is only available to borrowers who demonstrate financial hardship. To be eligible, your payments under PAYE must be less than what you would pay under the standard 10-year repayment plan. The repayment term under PAYE is 20 years, and any remaining loan balance is forgiven at the end of that period. Unlike REPAYE, PAYE caps your payments so they never exceed what you would have paid under the standard 10-year plan.

Best For: Borrowers who are new to the workforce, have high student debt compared to their income, and meet the financial hardship criteria.

2. Revised Pay As You Earn (REPAYE)

REPAYE is similar to PAYE but with some key differences. Under REPAYE, your monthly payments are capped at 10% of your discretionary income, and your repayment term is 20 years if you have undergraduate loans, or 25 years if you have graduate loans. One of the unique aspects of REPAYE is that it doesn’t have an income eligibility requirement, meaning anyone with eligible loans can apply, regardless of their income level. Additionally, REPAYE provides an interest subsidy: if your monthly payment doesn’t cover all of the interest that accrues, the government will pay 50% of the unpaid interest on subsidized loans and unsubsidized loans during the entire repayment period.

Best For: Borrowers with low incomes relative to their debt, especially those with graduate loans, who want to take advantage of the interest subsidy.

3. Income-Based Repayment (IBR)

IBR is one of the older IDR plans and has two versions, depending on when you first borrowed. For those who borrowed on or after July 1, 2014, IBR caps payments at 10% of your discretionary income and offers forgiveness after 20 years. For those who borrowed before that date, payments are capped at 15% of discretionary income, with forgiveness after 25 years. IBR requires you to demonstrate financial hardship to qualify, and your payments will never exceed what they would be under the standard 10-year repayment plan.

Best For: Borrowers who don’t qualify for PAYE but still need a lower monthly payment than the standard plan offers.

4. Saving on a Valuable Education (SAVE)

SAVE is a relatively new plan that is designed to be a more borrower-friendly version of IBR. Under SAVE, payments are capped at 10% of your discretionary income, similar to PAYE and IBR (post-2014). However, SAVE offers a more generous interest subsidy than REPAYE, which helps prevent your loan balance from growing if your payments don’t cover all the interest. Additionally, SAVE doesn’t have an income requirement, so it’s available to all borrowers with eligible loans, regardless of their income. The repayment term is 20 years for undergraduate loans and 25 years for graduate loans, with loan forgiveness at the end of that period.

Best For: Borrowers who want the benefits of IBR but with better interest protections and without the need to demonstrate financial hardship.

5. Income-Contingent Repayment (ICR)

ICR is the most flexible of the IDR plans but often results in higher payments than the other plans. Under ICR, your payments are the lesser of 20% of your discretionary income or the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income. Unlike the other IDR plans, ICR is available to both Direct Loan borrowers and those with Parent PLUS loans, provided the Parent PLUS loans are consolidated into a Direct Consolidation Loan. The repayment term under ICR is 25 years, with any remaining balance forgiven at the end of that period.

Best For: Borrowers with Parent PLUS loans or those who have high incomes and need a more flexible payment plan.

How Do IDR Plans Work?

When you sign up for an IDR plan, your monthly payment is calculated as a percentage of your discretionary income. Discretionary income is the difference between your income and 150% of the poverty guideline for your family size and state of residence. Depending on the plan, your payments could be as low as 10% or 20% of your discretionary income. This means that if your income is low, your payments could be significantly reduced—or even set at zero—until your financial situation improves.

The Benefits of IDR Plans

The most obvious benefit of an IDR plan is that it makes your student loan payments more affordable. But there’s more. After 20 or 25 years of qualifying payments (depending on the plan), any remaining balance on your loans can be forgiven. This forgiveness can be a huge relief, especially if your income remains low over a long period. Additionally, if you work in public service, you might qualify for Public Service Loan Forgiveness (PSLF) after just 10 years of payments under an IDR plan.

Potential Drawbacks to Consider

While IDR plans offer many benefits, they also come with some potential downsides. One major consideration is that extending your repayment period can mean paying more in interest over the life of the loan. Plus, the amount forgiven at the end of your repayment period could be considered taxable income, which could lead to a hefty tax bill. It’s important to weigh these factors and consider your long-term financial goals when deciding whether an IDR plan is right for you.

How to Apply for an IDR Plan

Applying for an income-driven repayment plan is relatively straightforward. You’ll need to fill out the Income-Driven Repayment Plan Request form, which you can do online through the Federal Student Aid website. Be prepared to provide information about your income and family size, and be sure to reapply each year to stay in the plan and keep your payments adjusted to your current financial situation. If your circumstances change—such as a significant increase in income—you might want to revisit your plan and see if switching to a standard repayment plan makes more sense.

Summary:

Income-Driven Repayment (IDR) plans are designed to make student loan payments more manageable by basing them on your income and family size. There are five main types of IDR plans: Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE), Income-Based Repayment (IBR), Saving on a Valuable Education (SAVE), and Income-Contingent Repayment (ICR). Each plan has different eligibility criteria and benefits, such as capping payments at a percentage of your discretionary income and offering loan forgiveness after 20-25 years. While these plans can significantly reduce monthly payments and offer forgiveness, they may also result in paying more interest over time, and forgiven amounts could be taxed. Applying for an IDR plan involves filling out a form online and providing income details, with annual recertification required to maintain the plan.