Student loans can be a substantial financial burden. Many graduates need help to make their monthly payments under the standard repayment plan. Luckily, several income-driven repayment plans can provide relief. These plans cap your monthly payments at an affordable percentage of your discretionary income. But which plan is right for you? Here’s an overview of the main income-driven repayment plans for federal student loans and an example of how they work.
What are Income-Driven Repayment Plans?
Income-driven repayment plans are repayment plans that base your monthly payment on your income and family size. There are four main income-driven plans:
- Revised Pay As You Earn (REPAYE)
- Pay As You Earn (PAYE)
- Income-Based Repayment (IBR)
- Income-contingent repayment (ICR)
These plans help borrowers who need help making payments under the standard 10-year repayment plan. They provide more affordable payments and loan forgiveness after 20-25 years of qualifying payments.
Example of Income-Driven Repayment
Let’s look at an example to understand how income-driven repayment works.
Sarah recently graduated with $30,000 in federal student loans at a 6% interest rate. Under the standard 10-year plan, her monthly payment would be $345. However, Sarah had just started her first job, making $40,000 annually. That $345 monthly payment is not affordable for her right now.
Instead, Sarah enrolls in an income-driven repayment plan to lower her payments. She chooses the REPAYE plan. Here is how her payment is calculated:
- Calculate Sarah’s discretionary income. This is her adjusted gross income minus 150% of the federal poverty guideline for her family size.
- Sarah’s AGI (salary): $40,000
- 150% of poverty for a family size of 1: $19,140
- Discretionary income: $40,000 – $19,140 = $20,860
2. Cap Sarah’s payment at 10% of discretionary income.
- 10% of $20,860 is $208.60
3. Since this is lower than the 10-year standard plan amount, Sarah’s new monthly payment is $208.60 under REPAYE.
This is much more affordable than the $345 she would pay under the standard plan. By enrolling in REPAYE, Sarah’s payment is reduced by almost 40%.
After 20 years of qualifying payments, any remaining loan balance is forgiven tax-free. This provides a light at the end of the tunnel for Sarah.
Also Read – Student Loan Forgiveness for 100% Disabled Veterans: A Complete Guide
Pros and Cons of Income-Driven Repayment
Income-driven plans provide payment relief but also have some drawbacks to consider:
Pros:
- Affordable monthly payments based on income
- Payments can be as low as $0 per month
- Loan forgiveness after 20-25 years
- Interest subsidies offered on some plans
Cons:
- More interest accrues over the life of the loan
- Loans may grow larger over time
- Tax liability on forgiven loan amounts
- Annual recertification required
Carefully weigh the pros and cons when choosing your repayment strategy. Make sure you understand the costs and benefits of an income-driven plan for your situation.
Overview of Main Income-Driven Repayment Plans
Here is a quick overview of the four main income-driven repayment plans and their key features:
Revised Pay As You Earn (REPAYE)
- Payment capped at 10% of discretionary income
- Forgiveness after 20 years (undergraduate debt) / 25 years (graduate debt)
- Interest subsidy offered
Pay As You Earn (PAYE)
- Payment capped at 10% of discretionary income
- Forgiveness after 20 years
- Interest subsidy offered
Income-Based Repayment (IBR)
- Payment capped at 10-15% of discretionary income
- Forgiveness after 20-25 years
- No interest subsidy
Income-contingent repayment (ICR)
- Payment capped at a lesser of 20% discretionary income or what you’d pay on 12 year fixed plan
- Forgiveness after 25 years
- No interest subsidy
Be sure to review the specific requirements for each plan. PAYE and IBR have eligibility restrictions, while REPAYE and ICR are open to all federal loan borrowers.
How to Apply for Income-Driven Repayment
Applying for income-driven repayment is a straightforward process. Follow these steps to enroll in a plan that fits your budget:
Choose a Plan
First, determine which income-driven plan makes the most sense for you.
- Use the Department of Education’s Repayment Estimator to compare plans.
- Consider factors like career goals, debt level, and if you qualify for PSLF.
- Consult with a financial aid advisor if you need help deciding which plan to pick.
Complete Application
Next, complete an income-driven repayment plan application.
- You can find applications at your loan servicer’s website or studentaid.gov.
- Submit proof of income, such as recent tax returns or pay stubs.
- Recertify income each year to remain on the plan.
Receive New Payment Amount
After processing the application, your servicer will let you know your new monthly payment amount.
- This can take 45-60 days after submitting all documentation.
- You must continue making current payments until the new amount takes effect.
- You can reject the new amount and stay on a current plan if payment increases.
Stick to the recertification deadlines each year. Please do so to avoid your payment reverting to the 10-year standard plan amount.
Maximizing Forgiveness with Income-Driven Repayment
One significant advantage of income-driven repayment is the promise of loan forgiveness after 20-25 years of payments. Here are some tips to maximize forgiveness:
- Make payments on time every month. Late or missed payments don’t count.
- Enroll as early as possible. This will result in more eligible payments.
- Lower your discretionary income to minimize monthly payments.
- Pursue Public Service Loan Forgiveness to receive forgiveness after just ten years.
- Be prepared to pay taxes on the forgiven amount.
- Keep detailed records of payments made over decades.
- Recertify income annually to stay enrolled in the plan.
- Make interest payments if you can afford to keep your balance from growing.
With careful planning, you can optimize income-driven repayment to receive maximum student loan forgiveness.
Also Read – Student Loan Forgiveness for Entrepreneurs
Who Should Consider Income-Driven Repayment?
Income-driven repayment plans are a good fit for certain borrowers:
- Recent graduates with entry-level salaries
- Teachers, social workers, and others in lower-paying fields
- Workers in non-profit and public service fields
- Borrowers who struggle to afford standard payments
- Anyone needing payment flexibility tied to income
- Those seeking Public Service Loan Forgiveness
Before enrolling, run the numbers and compare them to the 10-year standard plan. Ensure the savings and benefits outweigh increased interest costs over the long run.
These plans provide a safety net for those needing payment relief. But carefully weigh the pros and cons and get financial advice when evaluating options.
Who Should Avoid Income-Driven Repayment?
Income-driven repayment is only suitable for some. Those who may want to avoid income plans include:
- Borrowers able to comfortably afford standard payments
- Those with moderate debt levels can repay quickly
- Workers who expect significantly higher future earnings
- Older borrowers nearing retirement age
- Those averse to paying more interest over a loan’s lifetime
- Anyone seeking flexibility but able to prepay when possible
- Private loan borrowers (plans only apply to federal loans)
Run the numbers to see if you’ll pay less over time by sticking with the standard 10-year repayment plan. Income-driven repayment offers flexibility and forgiveness but results in more interest costs for many borrowers.
Comparison of Repayment Plans
Choosing a repayment strategy is a big decision. Here is a comparison of key features of standard vs. income-driven plans:
| Plan | Payment Amount | Term Length | Forgiveness? | Best for… |
| Standard | Fixed payment | 10 years | No | Borrowers who can afford payments and want to repay quickly |
| REPAYE | 10% discretionary income | 20 years undergrad, 25 years grad | Yes | Flexibility, PSLF borrowers |
| PAYE | 10% discretionary income | 20 years | Yes | Flexibility, payment relief |
| IBR | 10-15% discretionary income | 20-25 years | Yes | Affordability, flexibility for struggling borrowers |
| ICR | Lesser of 20% discretionary income or fixed 12 year payment | 25 years | Yes | Backup flexibility if don’t qualify for other income plans |
Evaluate your career goals, finances, and priorities to pick the best approach. An income-driven plan may provide flexibility today with forgiveness down the road. Or you can pay off loans faster under standard repayment.
Conclusion
Income-driven repayment plans like REPAYE, PAYE, IBR, and ICR can provide significant savings compared to the standard 10-year plan. But they are only suitable for some. Run the numbers to see if an income-driven plan makes sense for your financial situation.
Key factors include the loan amount, income, family size, career trajectory, and retirement goals. An income-driven plan may result in more interest paid over the life of the loan. Carefully weigh the pros and cons of your unique situation. Use calculators to estimate payments and compare different plans.
With skyrocketing student debt, income-driven repayment can provide relief to struggling graduates. But choose wisely based on your circumstances. An advisor can also help analyze plans to determine the optimal strategy for managing your student loans.
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