Income-based repayment options can take a load off if you’re struggling to afford your student loan payments, and it feels like a crushing weight is holding you down.
But your federal student loans actually come with a built-in safety net for just this situation — income-based repayment (IDR) plans. These plans allow borrowers with modest incomes to lower their monthly payments and get some financial breathing room.
There are multiple options to choose from, each with its own benefits and drawbacks. Here’s what you need to know in order to make a decision.
Why IDRs can be a great income-based repayment option
Income-driven repayment plans are just one of the pathways open to borrowers who can’t afford the monthly payment under the standard 10-year plan. Many graduates in the lower income range also opt for an extended or graduated payment plan, which both extend the repayment timeline. For lower-range earners, any of these three choices will usually result in a lower monthly payment.
However, only income-driven repayment plans offer loan forgiveness at the end of the term, usually after 20 or 25 years. This key difference is the main reason why most experts recommend opting for an IDR plan instead of an extended or graduated plan.
Borrowers will have to report the forgiven balance as income on their taxes, which is different from the Public Service Loan Forgiveness program. But it will still be less expensive than repaying the entire loan balance. However, borrowers who receive income-driven loan forgiveness through 2025 will not have to declare the money as income on their taxes.
Most income-driven repayment plans calculate the monthly payment as a percentage of your discretionary income, which is the difference between your annual salary and 150% of the federal poverty guidelines for your state and family size.
All income-driven repayments plans require that you submit updated information about your income and family size once a year. Your monthly payment will change if your income has increased, decreased, or if your family has grown. You can also resubmit your information more often if your financial situation worsens in order to qualify for a lower payment.
You can still qualify for an IDR plan if you’re unemployed and have no income. In this case, your payment would be $0. These ‘payments’ would still count toward the required timeline for loan forgiveness.
Could an IDR be right for you? Read on to learn about the five income-driven repayment plans and how they differ:
- Pay As You Earn Repayment (PAYE)
Under the PAYE plan, payments are 10% of your discretionary income. The term is 20 years, no matter what kind of loans you have. Only married couples filing taxes jointly will have both incomes counted.
These loans currently qualify for the PAYE plan:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans made to students
- Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents
- Revised Pay As You Earn Repayment (REPAYE)
The REPAYE plan calculates your monthly payment as 10% of your discretionary income. The term is 20 years if your loans were only used for an undergraduate degree, or 25 years if they covered both undergraduate and graduate degrees.
The following student loans are eligible for REPAYE:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans made to students
- Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents
Married borrowers will have their spouse’s income included in the calculation whether they file taxes separately or jointly.
- Income-Based Repayment (IBR)
With IBR, payments are either 10% or 15% of a borrower’s discretionary income, depending on when the loan was first disbursed. Your spouse’s income will count toward your monthly payment if you file taxes jointly, but not if you file taxes separately. The total term is either 20 or 25 years, which also depends on the loan’s disbursal date.
The following loans are eligible for IBR:
- Direct Subsidized and Unsubsidized Loans
- Subsidized and Unsubsidized Federal Stafford Loans
- All PLUS loans made to students
- Consolidation Loans (Direct or FFEL) that do not include PLUS loans (Direct or FFEL) made to parents
- Income-Contingent Repayment (ICR)
Under ICR, the monthly payment is either 20% of your discretionary income or the monthly amount you would pay with a fixed 12-year plan, whichever is lower. Payments on ICR are often higher than on other income-driven repayment plans, so it’s a less popular option for borrowers.
Your spouse’s income will only be considered if you file taxes together. The total loan term is 25 years.
The following loans qualify for ICR:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans made to students
- Direct Consolidation Loans
- Income-Sensitive Repayment (ISR)
The Income-Sensitive Repayment Plan is less well-known than other IDR plans because it only applies to FFEL loans, which were discontinued in 2010.
Only the following FFEL loans are eligible for ISR:
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- FFEL PLUS Loans
- FFEL Consolidation Loans
ISR is more restrictive than other income-driven plans. The repayment term is still 10 years, just like the standard plan, so the monthly payment won’t be as low as other repayment plans. There is also no loan forgiveness component with ISR.
If you have an FFEL loan, you can consolidate it into a Direct Consolidation Loan. This will open up more income-driven repayment options, including most of the plans mentioned above. Your monthly payment will likely be less under one of the other IDR plans.
Income-based repayment options can be a lifeline to struggling borrowers who want to keep working toward their loans without deferring them.
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