The federal government offers income-driven repayment plans for student loans to help make the payments more affordable. In traditional repayment plans, your monthly payment amount is based on paying the loan in full by a certain date. But in an income-driven plan, your monthly loan payments are based on your income and family size, which helps ensure you can afford your loan payment each month. This article covers how income-driven plans work. It includes an overview of the four different types of income-driven repayment plans, how to choose the right plan for you, and how to apply for the income-driven repayment program.
Written by Attorney Paige Hooper.
Updated January 10, 2022
If you’re struggling to make your federal student loan payment each month, an income-driven repayment plan could be the solution. The federal government offers these plans to help make student loan payments more affordable. In traditional repayment plans, your monthly payment amount is based on paying the loan in full by a certain date. But in an income-driven plan, your monthly loan payments are based on your income and family size, which helps ensure you can afford your loan payment each month.
This article covers how income-driven plans work. It includes an overview of the four different types of income-driven repayment plans, how to choose the right plan for you, and how to apply for the income-driven repayment program.
What Are Income-Driven Repayment Plans?
The economy works best when most people can afford to pay their bills each month and have enough money left over to spend on goods and services. When people default on their debts, their credit scores drop, and they can’t make big purchases like houses and cars. A widespread lack of buying power hurts the economy. So, the federal government has an interest in making sure that people can afford their student loan payments.
Enter income-driven repayment (IDR) plans. The term “income-driven repayment plan” refers to any of the federal student loan repayment programs that link your monthly loan payment to your taxable income. Your family size, the type of loans you have, and the state where you live also help determine your payment amount under these plans.
IDR plans make it easier for many borrowers to afford their monthly student loan payments and keep their loans out of default. These plans are often especially helpful for borrowers who:
Have a lot of student loan debt relative to their income,
Have a low income or are unemployed, or
Qualify for Public Service Loan Forgiveness (PSLF).
IDR plans are only available to federal student loan borrowers. Private student loans aren’t eligible for the programs. This includes federal loans that have been refinanced into private loans.
The 4 Types of Income-Driven Repayment Plans
Currently, the federal government offers four different types of IDR plans. All four plans are based on the same basic principle: You pay a certain percentage of your discretionary income for a certain number of years. For most plans, discretionary income is defined as your adjusted gross income (AGI) from your federal tax return minus 150% of the federal poverty guideline for your state and family size. At the end of the plan term, any unpaid balance left on your loan is forgiven, meaning you don’t have to pay it back.
IDR plans usually result in lower monthly loan payments than the Standard Repayment Plan. Depending on your income, your payment could be significantly lower — as low as $0 per month. The length of the repayment plan term and the percentage of your discretionary income you must pay depend on which type of plan you choose. The four IDR plan types are:
Pay As You Earn (PAYE) Plan
Pay 10% of your discretionary income each month for 20 years.
To qualify, your monthly payment under the PAYE plan must be less than your monthly payment would be under a 10-year Standard Repayment Plan.
You must qualify as a new borrower under the federal two-part test.
Revised Pay As You Earn (REPAYE) Plan
Pay 10% of your discretionary income for 20 years if all the loans you’re repaying under the plan were for undergraduate school.
If any of the loans you’re repaying under the plan were used for graduate or professional school, the plan term is 25 years instead of 20.
Income-Based Repayment (IBR) Plan
Pay 10% of your discretionary income for 20 years if you qualify as a new borrower.
Pay 15% of your discretionary income for 25 years if you don’t qualify as a new borrower.
To qualify, your monthly payment under the IBR plan must be less than your monthly payment would be under a 10-year Standard Repayment Plan.
Income-Contingent Repayment (ICR) Plan
Pay 20% of your discretionary income for 25 years.
But if your monthly payment would be lower under an adjusted 12-year Standard Repayment Plan, then you pay that lower monthly payment amount. The plan term is still 25 years, though, not 12 years.
For ICR plans, discretionary income means your AGI minus 100% of the federal poverty guideline for your location and family size. This is a different definition than all other plans.
IDR plans usually result in lower monthly loan payments than the Standard Repayment Plan. Depending on your income, your payment could be significantly lower — as low as $0 per month. At the end of the plan term, any remaining balance on your loan is forgiven, meaning you don’t have to pay it back.
Which IDR Plan Is Best for You?
All four IDR plans offer monthly payments that are based on your income. And all plans offer forgiveness of any remaining loan balance after you complete the plan. But each plan also has different rules and eligibility requirements. Some plans require you to pass the two-part “new borrower” test. Also, some plans are limited to certain types of federal student loans. You can find out what kind of loans you have online.
Only Direct Loans are eligible for all four IDR plan types. Family Federal Education Loan (FFEL) Program loans, on the other hand, are only eligible for IBR plans. If your loans aren’t Direct Loans, though, there’s still a workaround. If you consolidate your FFEL or Perkins loans into a Direct Consolidation Loan, the consolidated loan may be eligible for other IDR plan types.
In addition to eligibility, it’s also important to consider which plan type is best for your financial situation and goals. The Department of Education’s Federal Student Aid Office has an online loan simulator that lets you compare different repayment plans based on your loan information. If you qualify for Public Service Loan Forgiveness, all payments made under an IDR plan count toward your 10-year repayment term. Choosing the plan with the lowest monthly payments will help you maximize the benefits of the PSLF program.
If you’re still not sure which IDR plan to choose, you can ask your loan servicer to enroll you in the plan that will give you the lowest monthly payment. To do this, just select this option on your IDR plan application.
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Do IDR Plans Have Any Disadvantages?
There are some potential downsides to using an IDR plan. It could take longer to pay off your loans, so you could end up paying more in interest overall. This is because IDR plans have longer repayment periods — 20 to 25 years — compared to Standard Repayment Plans, which typically have a 10-year repayment term.
Another downside is that, if you’re married, your spouse’s income could affect your eligibility and payment calculations. If you and your spouse file your income taxes jointly, your discretionary income and monthly payment amount will be based on your joint income. This is true for all IDR plan types. If you file separately, PAYE, IBR, and ICR plans will only consider your income. But REPAYE plans will consider both you and your spouse’s income regardless of whether you file jointly or separately.
Finally, one of the great things about IDR plans is that any remaining loan balance is forgiven at the end of the plan term. The downside is that the IRS may treat the forgiven amount as income, meaning you’ll have to pay taxes on this amount. This doesn’t apply to loan balances forgiven under the PSLF program.
How Do You Get an Income-Driven Repayment Plan?
To apply for an IDR plan, you must fill out an application called the Income-Driven Payment Request and submit it to your loan servicer. You can complete and submit your application online, or you can complete a paper copy and mail it to your student loan servicer. You can apply to change your repayment plan at any time — there aren’t any special enrollment periods.
IDR plans are based on how much money you make, so you’ll need to provide some proof of your current income with your application. If you’ve filed your federal income tax returns for the past two years, and your current income is about the same as last year, you can use your most recent AGI. If you’re applying online, you can use the online IRS Data Retrieval Tool within the plan application website to transfer your AGI data. If you’re using a paper application, include a copy of your most recent tax return or tax transcript.
If you haven’t filed tax returns for the past two years or if your income is significantly different from what’s shown on your most recent tax return, you can submit pay stubs or other proof of your current income. If you don’t have any taxable income, you can indicate that on the application.
It can take your loan servicer several weeks or more to process your application. Online applications are generally processed faster than paper applications. Your loan servicer may put your loans into forbearance while your application is being processed. A forbearance means your monthly payments are suspended or reduced. You may not have to make loan payments while your application is being processed. But interest may still accrue on the loans during the forbearance.
You'll Need To Recertify Every Year
Income, family size, and location can all change from year to year. As a result, you must recertify your income and other information each year to stay in your IDR plan. If your family size changes or your income changes substantially, your loan payment amount will likely also change.
You’re only required to recertify once per year. If your income increases significantly during the year — you get a big raise, for example — you don’t have to change your payment until it’s time to recertify. But if your family size changes or you have a big drop in income, you don’t have to wait until your annual recertification date to lower your payments. You can submit updated documents and ask your loan servicer to recalculate your payments at any time.
You have to recertify your information by the deadline each year, even if your information hasn’t changed. If you don’t recertify by your deadline, you’ll either be placed on a different repayment plan (usually with higher payments) or your monthly payment will be changed to match your payment under a Standard Repayment Plan. Also, any unpaid interest that accrued while you were in the IDR plan may be added to your principal loan balance. If you miss the recertification deadline, you can re-enroll in the IDR program, but your repayment term may start over again.
What if You Can’t Afford IDR Plan Payments?
If your estimated payments under an IDR plan are too high for you to afford because of your loan type, your spouse’s income, or other factors, there are other repayment options that might help. You may want to consider the federal government’s extended repayment or graduated repayment plans. These plans aren’t income-based, but they could result in lower monthly payments. Keep in mind, though, that you could end up paying more interest under these plans. Also, neither of these plans offers loan forgiveness.
Refinancing your student loans could be another option to lower your monthly payments, depending on the refinanced loan’s terms. The federal government doesn’t refinance student loans, though, so refinanced loans will always have a private lender. In other words, when you refinance, your loans lose their federal status. That means you give up your eligibility for federal programs like loan deferment, forbearance, and student loan forgiveness.
The federal government offers four types of IDR plans for federal student loans. In these plans, your monthly loan payment is based on your income, your family size, and your location. Each plan has different requirements, but in general, you’ll pay 10-20% of your discretionary income for 20-25 years. Any amount that’s still unpaid after that time is forgiven.
IDR plans usually offer lower monthly payments than Standard Repayment Plans, but you could pay more interest because of the longer repayment period. You might also have to pay taxes on the forgiven amount. Not every federal loan is eligible for every type of IDR plan. Private student loans also don’t qualify for IDR plans.