Income-Driven Repayment for Student Loans: How It Works
The Department of Education offers four income-driven repayment (IDR) plans that could reduce your monthly student loan bill based on your income and family size. In particular, the new SAVE plan is set to help borrowers put even more money back in their pockets.
At its core, each IDR plan sets repayment at what is hopefully an affordable level, allowing your monthly payment to potentially drop as low as $0 if you have no or little income.
Income-driven repayment plan options
| Repayment plan | Income requirements | Eligible loans | Repayment terms |
|---|---|---|---|
| Saving on a Valuable Education (SAVE) | Before July 2024: 10% of discretionary income After July 2024: 5% of discretionary income for borrowers with undergraduate loans 10% of discretionary income for graduate school loans A weighted average for a combination of graduate and undergraduate loans. | Direct and Direct PLUS loans in good standing Consolidated FFEL and FFEL PLUS loans made to student borrowers | 10 years for undergraduate borrowers with loan balances of $12,000 or less One additional year per each $1,000 borrowed over $12,000 for undergraduate borrowers with higher loan balances, up to 20 or 25 years 25 years for graduate loans |
| 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)* | Direct subsidized, unsubsidized and grad 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) |
| Pay As You Earn (PAYE) | 10% of discretionary income* | Direct subsidized, unsubsidized and grad PLUS loans Most FFEL loans, FFEL PLUS loans and Perkins loans (if consolidated) | 20 years |
| 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 | 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 |
*Monthly repayment amount can never be more than what you would pay with the 10-year standard repayment plan
Is an income-driven repayment (IDR) plan right for you?
Every single borrower has a different financial situation. However, there are a few scenarios where choosing an income-driven repayment plan typically makes sense.
- You have a lot of student loan debt and a low income
- You’re currently unemployed
- You can’t afford your current loan payments and want to avoid default
- You qualify for Public Service Loan Forgiveness (PSLF)
If you meet one of the above criteria, it may make sense to switch to an IDR plan. Contact your loan servicer or the Federal Student Loan Information Center to discuss the options that are available to you.
Saving on a Valuable Education (SAVE)
| Payment amount |
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| Eligible loans |
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| Repayment terms |
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What to know
The new Saving on a Valuable Education (SAVE) plan is set to be a popular option among student borrowers.
Replacing the Revised Pay As You Earn (REPAYE) plan, SAVE will reduce the amount of income that many borrowers have to put toward their student loans each month. Some borrowers will even qualify for $0 monthly payments.
Additionally, it will allow many borrowers to achieve student loan forgiveness sooner, particularly if they have lower principal balances on undergraduate loans.
Pros
The lowest monthly payment amount available to IDR borrowers
Your remaining balance will be forgiven at the end of your repayment period
Cons
You might owe income tax on the forgiven amount
Income-Based Repayment (IBR)
| Payment amount |
|
| Eligible loans |
|
| Repayment terms |
|
*Monthly repayment amount can never be more than what you would pay with the 10-year standard repayment plan
What to know
The Income-Based Repayment (IBR) plan is a popular option, since it doesn’t matter when you received your federal student loans. While it’s similar to Pay As You Earn (PAYE) (to be discussed below), it offers more flexibility.
With IBR, your new payments must be lower than what you would pay on the standard repayment plan. In addition, you’ll need to demonstrate financial need based on your annual income and family size.
Ultimately, you should qualify for IBR if your student loan debt makes up a significant portion of your annual income.
Pros
Lower payments than the 10-year standard repayment plan
Those with Perkins loans are also eligible
Cons
You could pay more interest in the long run
Forgiven loans may be considered taxable income
What is discretionary income?
Discretionary income is calculated by finding the difference between your adjusted gross income and a given percentage of the annual poverty line for your state’s family size, depending on which plan you’re on.
IDR plans are individualized based on the following details:
- Income
- Cost of living
- Family size
- State of residency
Pay As You Earn (PAYE)
| Payment amount |
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| Eligible loans |
|
| Repayment terms |
|
*Monthly repayment amount can never be more than what you would pay with the 10-year standard repayment plan
What to know
Similar to IBR, you have to demonstrate financial need with the Pay As You Earn (PAYE) plan. However, this plan comes with stricter requirements.
For instance, you’ll need to have a federal Direct loan or FFEL program loan issued on or after Oct. 1, 2007 and have received a Direct or FFEL loan disbursement on or after Oct. 1, 2011.
To take advantage of PAYE, your proposed payments must be smaller than those on the standard repayment plan.
Pros
The second-lowest IDR payment amounts for all eligible borrowers
Loans are eligible for forgiveness after 20 years of payments
Cons
Loans issued before 2007 aren’t eligible
Forgiven loans might be considered taxable income
Income-Contingent Repayment (ICR)
| Payment amount |
|
| Eligible loans |
|
| Repayment terms |
|
What to know
Income-Contingent Repayment (ICR) doesn’t have an income eligibility requirement. It’s also the only income-driven repayment plan where Parent PLUS loans can qualify after you consolidate them into a Direct Consolidation loan.
If you don’t qualify for the other IDR plans but need a lower payment, the ICR plan could be a good option.
Pros
Anyone can qualify, regardless of income
You might be eligible for loan forgiveness after completing your repayment plan
Parent PLUS loans are eligible if consolidated first
Cons
Has the highest potential payment amount of all IDR plans
Payments might not be lower than the standard repayment plan
Forgiven loans could be considered taxable income
Choosing an IDR plan
An income-driven repayment plan can lower your student loan payments, making it easier to manage your debt. But what is the best IDR plan for you?
Start by determining whether you qualify based on your income and family size. Calculate your annual household income and compare it with the federal poverty guideline.
Next, consider how much interest you’ll pay compared to the standard repayment plan. You can estimate various payment scenarios with Federal Student Aid’s Loan Simulator.
Keep in mind that you’ll likely pay more interest over the loan’s duration if you pick a lower monthly payment and an extended repayment period. If you can afford it, sticking with the standard repayment plan can save you the most money in the long run.
Meanwhile, here are certain situations where particular IDR plans could be a good fit:
- You expect your income to increase in the near future: If your earnings climb significantly during your repayment period, this could send your monthly SAVE or ICR bill rising above what you would owe with the standard 10-year plan. PAYE and IBR, however, have caps on how high payment can reach, so they may be better in this case.
- You have loans from graduate school: Any grad school loan will lengthen the time for forgiveness to 25 years (versus 20 years for undergrad loans). As a result, SAVE, PAYE and IBR might be better choices if you can qualify for them.
How to apply for income-driven repayment
Submit the income-driven repayment plan request form online at StudentAid.gov, or contact your student loan servicer for a paper form.
Remember that you’ll have to demonstrate financial need to be eligible for SAVE, IBR and PAYE. You can use your recent federal tax return to verify your adjusted gross income, or save time by using the IRS Data Retrieval Tool to quickly transfer your data.
If you haven’t filed your most recent tax return yet or you’re currently unemployed, you can provide alternative documentation, such as pay stubs or unemployment statements.
Recertifying your income and family size every year
To remain on an income-driven repayment plan, you’ll have to recertify your income and family status every year.
Luckily, the new SAVE plan lets you agree to have your information automatically sent to the Department of Education each year, which can save you from having to remember to submit the information each year.
However, if you choose not to go that route, your student loan provider(s) will likely notify you when the deadline is approaching. But, it’s still a good idea to set a reminder to ensure you don’t miss it.
Be aware, in addition, that your IDR payments will usually change with income and family size adjustments.
Alternatives to IDR plans
While income-driven repayment plans can lower your federal student loan payments, they aren’t always the perfect solution.
Some borrowers aren’t eligible for IDR plans, while others can’t afford the IDR payments. Here are some additional options to explore to help you manage your student loan payments:
- Extended repayment plan: This plan can extend your repayment plan for up to 25 years, lowering your monthly bill in the process. However, you’ll need to have at least $30,000 in federal student loans to be eligible. This payment plan doesn’t count toward Public Service Loan Forgiveness (PSLF).
- Graduated repayment plan: Payments start low and slowly increase, typically every two years until the debt is repaid within 10 years (10 to 30 years for consolidation loans). Anyone with qualifying federal student loans is eligible, but repayments don’t count toward PSLF.
- Student loan refinance: Refinancing your federal student loans with a private lender could get you a better rate and lower your monthly bill. However, it’s important to know that you’ll lose access to government protections, such as income-driven repayment plans and student loan forgiveness programs. Weigh the pros and cons of refinancing federal debt before moving forward to ensure it’s the right decision for you.