Is the Income-Based Repayment Plan Right for Your Student Loans?
Income-Based Repayment (IBR) is a program that caps your monthly student loan payment at an affordable level based on your income, and then forgives whatever you still owe after 20 or 25 years.
IBR is a type of income driven repayment plan (IDR) for federal student loans. All IDRs have similar features — monthly repayment limits and eventual forgiveness — although each has slightly different rules.
To see whether IBR is right for you, let’s take a look at the details and compare them to other IDR options, including a new type recently proposed by the Department of Education.
What is Income-Based Repayment?
The term “Income-Based Repayment” is sometimes misused as a catch-all for the various income-driven repayment plans available today.
But Income-Based Repayment is just one of the four IDR plans the Department of Education currently offers. Like other IDR plans, IBR can assist students who are struggling with their monthly federal student loan payments under the standard repayment plan.
How IBR and other IDR plans can lower your monthly costs
The 10-year standard repayment plan is the default for federal student loan borrowers, but it’s not always the most affordable option.
High student loan balances equal high monthly payments, which can be challenging to manage. In such situations, an IDR plan could be just the break you need. Instead of basing payments on your balance, they are determined by your income and family size, helping make your student loan bill more affordable.
Specifically, IDR plans set payments at a percentage of your discretionary income (see below). With the IBR plan, your payment is capped at 10% of discretionary income for those who got their loans after July 1, 2014, or 15% for those who borrowed before then.
What is discretionary income?
Your discretionary income is calculated by finding the difference between your adjusted gross income and 150% of the annual poverty line for a family of your size and in your state.
This means your student loan payments under IDR plans are individualized to match the following details:
- Income
- Costs of living
- Family size
- State of residency
Enrolling in Income-Based Repayment or other IDR plans
Only federal student loans are eligible for IDR plans — not private student loans. However, the type of federal student loan you have will determine which IDR plan you can qualify for and what percent of discretionary income you’ll need to pay.
Note that for parents who took out a PLUS loan or other federal student debt for their children, the only available IDR plan is Income Contingent Repayment (ICR). In order to enroll in this plan as a parent, however, you would first need to switch to a Direct Consolidation Loan.
To access these lower payments, you’ll first need to apply and get approved for an IDR plan. To enroll in Income-Based Repayment or another IDR plan, contact your student loan servicer or request an IDR plan via StudentAid.gov. Your servicer can help direct you in switching your loans over to an IDR option.
The enrollment process involves certifying your income. Your payments are reevaluated and recalculated each year, so you must recertify your income annually to remain on the plan.
If your situation suddenly changes, such as after a job loss, you can recertify your income before the annual renewal date.
How does IBR compare to other income-driven repayment plans?
It’s important to understand the finer details of each IDR plan in order to pick the one that best suits your specific needs.
| Repayment plan | Income requirements | Eligible loans | Repayment terms |
|---|---|---|---|
| Income-Based Repayment (IBR) | 10% of discretionary income for new borrowers (on or after July 1, 2014)* 15% of discretionary income for older borrowers (before July 1, 2014)* | Most Direct and Direct PLUS loans Most Federal Family Education Loan (FFEL) and FFEL PLUS loans Perkins loans (if consolidated) | 20 years for new borrowers (on or after July 1, 2014) 25 years for older borrowers (before July 1, 2014) |
| Income-Contingent Repayment (ICR) | 20% of discretionary income or The amount you would pay with a fixed payment over 12 years, adjusted to your income | Most Direct and Direct PLUS loans Most FFEL loans, FFEL PLUS loans and Perkins loans (if consolidated) Federal student loans taken by parents (if consolidated) | 25 years |
| Pay As You Earn (PAYE) | 10% of discretionary income* | Most Direct and Direct PLUS loans Most FFEL loans, FFEL PLUS loans and Perkins loans (if consolidated) | 20 years |
| Revised Pay As You Earn (REPAYE) | 10% of discretionary income | Most Direct and Direct PLUS loans Most FFEL loans, FFEL PLUS loans and Perkins loans (if consolidated) | 20 years (undergraduate) or 25 years (graduate) |
*Monthly repayment amount can never be more than what you would pay with the 10-year standard repayment plan
Important: New income-driven repayment plan
On Jan. 10, 2023, the Department of Education proposed a revised income-driven repayment plan to replace REPAYE (see chart above). Although the rules aren’t finalized yet, the draft estimates that 85% of student loan borrowers would be debt-free within 10 years under this scheme.
Specifically, the new plan would feature the following:
- No monthly payment required for single borrowers making less than $30,500 per year (or $62,400 for a family of four)
- Other borrowers could expect to see their monthly payments cut by at least half, with the average graduate of a four-year public university potentially saving close to $2,000 a year compared to the current REPAYE plan.
- Those who borrowed $12,000 or less would enjoy student loan forgiveness after 10 years instead of the typical 20 to 25 years. (An additional year will be required for each $1,000 over that amount.)
- Interest for those paying less than the monthly interest charge on their loans will be covered by the government instead of the borrower
In an effort to simplify student loan repayment, the plan is to eventually phase out enrollments in PAYE and ICR plans, while limiting the option for borrowers to later switch to the IBR plan.
The Department of Education hopes to finalize the new plan by the end of 2023.
Should you switch to income-driven repayment?
Although there are significant benefits to enrolling in an IDR plan, there are also some potential drawbacks to consider. Here are some upsides and downsides:
Pros of income-driven repayment plans
- Monthly payments are more manageable: All IDR plans for federal student loans can reduce your monthly payments if you have a low income and substantial student loan balance.
- Adjust payments when your income or family size changes: If your work hours are cut, or you welcome a new baby to the family, you can recertify your IDR plan. Monthly payments will be recalculated according to changes in your income and family circumstances. They can be as low as $0 if your financial situation warrants it.
- You can get student loan forgiveness: Depending on the IDR plan you choose, you can become eligible for student loan forgiveness after 20 to 25 years of on-time payments (and maybe after 10 years if the newly proposed IDR plan takes off). Also, through at least 2025, forgiven amounts won’t be subject to federal income tax, thanks to the COVID-19 pandemic era legislation.
- Take advantage of Public Service Loan Forgiveness: If you’re eligible for Public Service Loan Forgiveness (PSLF), enrolling in Income-Based Repayment or a similar IDR can lower payments and help you maximize the benefits of this program. PSLF grants student loan forgiveness of any remaining balance after just 10 years of qualifying payments. Loans forgiven through PSLF won’t incur a tax bill, as this is not considered taxable income.
Cons of income-driven repayment plans
- Loans take longer to repay: Since you’re paying less each month, it will generally take longer than the typical 10 years on the standard repayment plan to get out of student debt. IDR plans currently stretch repayment out over 20 to 25 years — though this could change if the new IDR plan is launched.
- You might pay more interest with IDR: Smaller payments are great for your budget, but you could end up spending more interest over the life of your loan. That’s because you’ll be accruing and paying interest for an additional 10 to 15 years.
- Your student loan balance could grow: If your student loan balance is very high, you might have high monthly interest charges. But under IDR, your monthly payments might not cover your interest. Interest that goes unpaid could be added as capitalized interest, causing your balance to grow instead of shrink.
- More paperwork: You must apply for income-based student loan repayment or IDR plans, and you’ll also have to recertify your income every 12 months.
- Your choices might be limited: Not all federal student loan borrowers qualify for an IDR. You might be eligible only for certain plans. Other borrowers might have to consolidate federal student loans to qualify for IDR.
- Your income might be too high to qualify: If 10% of your discretionary income is higher than your monthly payment on a standard repayment plan, then you won’t be able to benefit from the Income-Based Repayment or PAYE plans. If you’re married and filing jointly, your combined income and total loan debt will dictate your IDR payments.
Is Income-Based Repayment right for you?
Still trying to decide whether Income-Based Repayment or another IDR plan is right for you? Here are a few things to keep in mind with your budget and financial situation:
1. Estimate your monthly payment
Before settling on Income-Based Repayment, you can estimate your new monthly payment with our student loan repayment calculator. This can help you see what a new plan might cost you.
2. Know the tax implications
Can you pay off your student loans before the repayment term is complete? Or do you expect to have some debt forgiven after the payment period is up?
If you’re banking on student loan forgiveness, keep in mind that in the past, any forgiven debt under an income-driven plan was taxable prior to pandemic-related measures that made these tax-free. It’s unclear if tax-free forgiveness included in student loan stimulus relief will be renewed after it expires on Jan. 1, 2026.
If you won’t be reaching forgiveness until well past that date, discuss your tax implications with a professional so you know what to expect before applying for Income-Based Repayment.
3. Choose what’s right for you
Remember, Income-Based Repayment or another IDR plan can help you regain control of your finances without putting payments on hold. Take the time to research the best options and estimate your new monthly payment before selecting a plan that works for you.
Going for the lowest monthly student loan payment is appealing, but don’t let that sway your final decision. Consider all the facts and numbers before choosing IBR or a similar repayment plan.
Choosing a plan that balances your need for affordable payments now with long-term costs and repayment is wise. Before proceeding, read more about choosing the best student loan repayment plan for your situation.