Graduating from college is a huge accomplishment and one that’s certainly worth celebrating. The one thing that can dampen the celebrations, however, is having to face up to your student loan debt.
For a lot of newly minted college grads, the struggle to find a decent-paying job and keep up with their loan payments is all too real.
Fortunately, the federal government lends borrowers a hand when it comes to repaying their debt.
Income-Driven Repayment programs (IDR) offer some financial relief for cash-strapped grads who need a little relief from their loans.
Not sure how IDR programs work or whether it’s the right option for you? Find out all the details on income-driven repayment and managing your student loan debt.
What Is Income-Driven Repayment?
Income-driven repayment is a very broad term that covers specific student loan repayment programs.
Generally, an income-driven repayment plan sets your monthly student loan payment at an amount that’s affordable for your budget.
Affordability is determined by your income, family size and the IDR plan you’re on.
There are four types of IDR programs to choose from:
1. Pay As You Earn (PAYE)
The Pay As You Earn plan caps your monthly federal student loan payment at 10 percent of your discretionary income.
This plan has a maximum 20-year repayment period. After that, any remaining loan balance is forgiven.
To qualify for Pay As You Earn, the payment you’d have to make must be less than what you’d pay on a 10-year Standard Repayment plan.
You should meet this requirement if your federal loan debt is higher than your annual discretionary income.
Discretionary income means what you have left over after you pay for housing, utilities, food and other essentials.
Note: The PAYE program is open to borrowers who took out loans after October 1, 2007 and received a disbursement of a Direct Loan on or after October 1, 2011.
Who it’s good for:
The Pay As You Earn program is designed for people who have a partial financial hardship or whose income doesn’t allow them to make payments on a Standard plan.
This might be good if you’re working in a lower-paying job and you don’t expect your income to spike up overnight. If your income does go up, your payment would never be higher than what you’d pay on the Standard plan.
2. Revised Pay As You Earn (REPAYE)
The Revised Pay As You Earn opens up the Pay As You Earn plan to a broader range of people. This plan still limits your monthly payments to 10 percent of your discretionary income.
The difference is that you have 20 years to repay undergraduate loans and 25 years to repay loans for graduate or professional study. After that, the rest of your loans are forgiven.
Any borrower with eligible federal loans can make payments under the REPAYE plan. There’s an exception for Direct PLUS Parent Loans or Federal Family Education Loans made to parents. Those don’t qualify.
Who it’s good for:
You may want to consider REPAYE if you don’t qualify for the original Pay As You Earn plan. It’s possible to bring your monthly payments down to $0.
That’s huge if you’re working in a public service job and hoping to qualify for Public Service Loan Forgiveness.
That program offers a chance to have any remaining loans forgiven after 10 years if you’re working in a public service role.
A couple of caveats, however. Unlike traditional Pay As You Earn, the revised plan doesn’t cap your monthly payments. If your income takes a big leap, your payments could also.
If you’re married, your spouse’s income and federal student loan debt are factored in when determining your monthly payments. If they have a higher income, that could disqualify you from a Revised Pay As You Earn plan.
3. Income-Based Repayment (IBR)
Income-Based Repayment bases your monthly payments at 10% or 15% of your discretionary income, depending on when you took out your loans. Forgiveness is available once your loan repayment term ends.
The 10% cap applies if you took out loans on or after July 1, 2014; the 15% cap applies if you took out your loans before then.
In either case, your payments would never be more than the 10-year Standard Repayment plan amount.
How long you have to repay your loans also hinges on when you initially borrowed. New borrowers who took out loans on or after July 1, 2014 have 20 years to pay back their loans. All other borrowers get 25 years.
Note: Income-driven repayment plans and Income-Based Repayment plans aren’t the same. The terms are often used interchangeably but income-driven repayment refers to all income-based plans. IBR is a specific type of income-driven repayment.
The eligibility requirements for IBR are the same as the PAYE plan. Essentially, the payment you make has to be less than what you’d pay on a 10-year Standard plan.
The types of loans Income-Based Repayment covers is also the same. Generally, you can apply for IBR with any type of Direct, Stafford or FFEL loan, excluding loans made to parents.
Who it’s good for:
IBR doesn’t require you to consolidate any of your loans to qualify. If you want to get on a Pay As You Earn plan or Revised Pay As You Earn plan, you’d have to consolidate your loans first.
Generally, Income-Based Repayment is good for borrowers who want a streamlined application and approval process, since PAYE can be harder to qualify for. It’s also a better choice than REPAYE if you’re worried about your monthly payments going up.
4. Income-Contingent Repayment (ICR)
With an Income-Contingent Repayment plan, payments are set at either 20 percent of your discretionary income or what you’d pay on a 12-year repayment plan with fixed payments adjusted according to your income.
Your monthly payments may not be as low on ICR as they are with other plans, but you get 25 years to repay your loans. Anything left over after that is forgiven.
Anyone with eligible federal student loans can make payments under an ICR plan. This is the only income-driven plan that’s available for Parent PLUS Loan of FFEL Parent Loan borrowers.
Who it’s good for:
ICR may be appealing to borrowers with Parent PLUS or FFEL Loans. You have to consolidate these loans with a Direct Consolidation Loan to qualify but you may be able to bring your monthly payments down.
Income-Contingent Repayment may also be good if you can’t afford a Standard Repayment plan but you can afford to pay more than what other income-driven repayment options require.
The more you can pay, the more you money you can save in interest over the long run.
How to Apply for Income-Driven Repayment
Applying for an income-driven repayment plan is fairly easy. You can do it online through StudentLoans.gov. To apply, you’ll need:
- A verified Federal Student Aid ID
- Your name, phone number, and email address
- Documentation to verify your income (your spouse will also need to provide this if you’re married)
It takes about 10 minutes to apply for an income-driven repayment plan. Once the Department of Education has all of your information, they’ll review it to see which repayment options you qualify for.
From there, you can choose a plan and sign off on the paperwork to finalize it. After that, you’ll start making payments under your new plan.
Remember to keep up with your regular loan payments in the meantime. If you miss a payment while your loans are being restructured, that could hurt your credit score.
How Are Your Monthly Payments Calculated for Each Plan
Monthly payments for each income-driven repayment plan are based on your discretionary income. Again, that’s the amount of money left to you each month after your living expenses are paid.
Payments are calculated using a percentage of the federal poverty threshold. The percentage used is different, depending on the plan.
- For Income-Based Repayment and Pay As You Earn, your discretionary income is the difference between your annual income and 150 percent of the poverty guideline for your household size in your state.
- For Income-Contingent Repayment, your discretionary income is the difference between your annual income and 100 percent of the poverty guideline for your household size in your state.
The poverty guidelines are established by the U.S. Department of Health and Human Services. You can take a look at how different states stack up here.
Here’s an example of how your monthly payments for different plans might compare:
Assume you have $26,946 in loans at 3.9 percent, which is the average loan balance for students who attended public four-year universities.
You’re single with no children and have an adjusted gross income of $30,000 a year. As a California resident, your payments under each plan would look like this:
Example of Monthly Payment Under Various IDR Programs
|IDR Program||Monthly Payment*|
|Standard Plan||$272 per month for 120 months|
|Pay As You Earn (PAYE)||First payment $99, last payment $272 for 206 months|
|Revised Pay As You Earn (REPAYE)||First payment $99, last payment $326 for 202 months|
|Income-Based Repayment (IBR)||First payment $149, last payment $272 for 155 months|
|Income-Based Repayment (IBR) For New Borrowers||First payment $99, last payment $272 for 206 months|
|Income-Contingent Repayment (ICR)||First payment $172, last payment $209 for 192 months|
*Calculations assume that payment increases over time, based on increases in income.
Obviously, the numbers will look different for every borrower, based on filing status, family size, income, loan balance, interest rate and state of residence.
You can use the Department of Education’s Repayment Estimator to get an idea of how your loan payments might compare under different plans.
The key thing to remember is that unless you’re on the Standard Repayment plan, your payments won’t necessarily be the same throughout the life of the loan.
You have to renew your income-driven repayment plan every year using this form. Specifically, you have to give the Department of Education:
- Proof of income, such as tax returns or pay stubs
- Your spouse’s income information if you’re married
- Information about your family size
- Your Federal Student Aid ID
The government uses your information to update and verify your repayment plan eligibility. If you get married or divorced, have a job change or start a family, that could impact which plan you qualify for and your monthly payments.
Who’s Eligible for Income-Driven Repayment?
Not everyone will be able to get on an income-driven repayment plan. Eligibility primarily depends on three things:
- Income and family size
- Type of loans you have
- When you first borrowed
Pay As You Earn, Revised Pay As You Earn Plan and Income-Based Repayment plans are open to anyone with eligible federal loans. That includes:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans for graduate study
- Direct Consolidation Loans (not including ones that were used to repay Parent PLUS loans)
- Subsidized and Unsubsidized Federal Stafford Loans
- Federal Family Education (FFEL) PLUS Loans
- Federal Perkins Loans
Excluded from the list are Direct PLUS Loans made to parents, FFEL PLUS Loans made to parents and FFEL Consolidation Loans that repaid PLUS Loans to parents.
Stafford Loans and eligible FFEL PLUS Loans have to be consolidated first to qualify for an income-driven plan.
The same loans are eligible for Income-Contingent Repayment. You also have the added benefit of being able to include any Direct PLUS or FFEL Loans made to parents.
Is an Income-Driven Repayment Plan Right for You?
So now you know how income-driven repayment works and what your options are. The question is, does an income-driven repayment plan make sense?
Generally, IDR programs are the best option for you if:
- You have a very high loan balance relative to your income
- You work in public service and are hoping to qualify for Public Service Loan Forgiveness after 10 years
- Your income and household size put you at or near the poverty line
- You don’t have any taxable income and that isn’t likely to change anytime soon
In these scenarios, IDR can make your payments more reasonable and affordable for your budget. For some borrowers, it could take their payment down to $0.
IDR programs should be a considered option for you:
- You have a temporary financial hardship that’s making it difficult to keep up with your payments on a Standard Repayment plan
- You file taxes separately from your spouse and have a very low income
- You have multiple loans with varying interest rates that you plan to consolidate
There’s really only one situation where an income-driven repayment plan would likely be the wrong move for you:
- Your payment under the IDR plan would allow you to pay off the loan in less time than the repayment term (so you wouldn’t be eligible to have any of your loans forgiven in that case)
What Are the Downsides to Income-Driven Repayment?
Pros & Cons of IDR Programs
Income-driven repayment can ease the burden of repaying your student loans. But, it’s not without some drawbacks.
First, interest still accumulates and capitalizes on your loans during the repayment period.
That means you could end up paying back more than you originally borrowed over time.
Next, any forgiven loan balance is taxable on an income-driven repayment plan. You can avoid paying income tax if your loans are forgiven under the Public Service Loan Forgiveness program.
But otherwise, you run the risk of a big tax bill if you have a large amount of loan debt forgiven.
Finally, you’re stretching out your repayment term with an income-driven plan. That means not only will you pay more in interest over the life of the loan, you have to factor the monthly payments into your budget for a longer time period.
You need to think about how that affects your ability to save or plan for other financial goals, like buying a home or saving an emergency fund.
Alternatives to an Income-Driven Repayment Plan
If you don’t think income-driven repayment is a good fit or you don’t qualify, there are other options to consider.
1. Other Loan Forgiveness Programs
Loan forgiveness is available from other programs besides income-driven repayment. For example, you may be able to get federal loan forgiveness if you’re a nurse or a teacher working in an underserved area.
There are also state-sponsored forgiveness programs, as well as programs offered by professional associations and employers. We’ve put together a complete list of loan forgiveness options here.
Student loans can be refinanced the same as any other loan. You apply for a new loan and use it to pay off the old ones.
There are two benefits here: streamlining your loans into a single monthly payment and potentially lowering your interest rate.
A lower interest rate can also lower your payments and help you pay your loans off faster. The catch with student loan refinancing is that it’s done through private lenders, not the government.
That means you’ll need a good credit rating to get approved. If you have newer credit or a lower credit score, you may need a cosigner to finalize a refinance.
Deferment and forbearance don’t change the terms of your loan; instead, they give you a temporary break from your payments.
With deferment, the government pays the interest on your loans for you. You can a deferment on federal loans for up to three years.
Forbearance is usually associated with a financial hardship. During a forbearance, you don’t have to make any payments but the interest continues to accrue on your loans.
That could mean your loan balance will be higher than when you started after you resume making payments.
Consolidation is available for federal loans. It’s similar to refinancing, in that all of your loans are combined into one. The difference is in your interest rate. Instead of getting a rate based on your credit, your rate reflects the average of all the rates you paid across your loans.
Consolidation doesn’t require a check or a cosigner. Unless you request an income-driven plan, consolidation assumes a Standard 10-year repayment plan. If your average interest rate is low, that may lower your payments to a degree but it wouldn’t be as much as an income-driven plan.
Bankruptcy is the option of last resort for dealing with student loans. Loans can be discharged in a Chapter 7 bankruptcy, meaning your balance is completely wiped out. But, there are some very strict guidelines to qualify for a discharge.
Essentially, you have to be able to prove that you have a severe and sustained financial hardship that would keep you from ever paying on your loans.
Depending on your situation, your loans may only be partially discharged, meaning you’d still owe something after the bankruptcy.
The other consequence of bankruptcy is the damage to your credit. Filing bankruptcy can destroy your credit score and it can take a couple of years to rebound after the fact.
For that reason, bankruptcy is something to consider only when you have no other way to manage your loans.
The Bottom Line
Income-driven repayment can seem a little complicated if you’re not sure how different plans compare. Taking time to understand how they work can help you decide which plan, if any, are suited to your situation.
If you’re eligible for multiple plans, review them carefully. Look at what your monthly payment would be and the loan repayment term.
Consider whether the plan caps your monthly payments. Crunching the numbers can give you an idea of how much you’ll pay over the life of the loan and what the interest total will be.
If you choose one plan and it ends up being a poor fit, you do have the ability to change it. You just have to reapply and provide all your financial information again.
Remember though, that if your income has increased since you initially got on an income-driven plan that could affect your eligibility for a different plan, and your payments could also be affected.