Types of Income-Driven Repayment Plans

The idea is simple: Give borrowers a safety net that keeps them out of default and late payments off of their credit reports by tying their federal student loan payments to how much they earn. Unfortunately, these income-driven repayment plans are complex loan products with a dizzying array of slightly different rules that stump even the companies that manage them for the U.S. Department of Education.

To save you from reading through all the details in our guide to IDR Plans, below are the four types of income-driven repayment plans and how you can qualify for them.

* The Education Department is reviewing borrowers’ accounts to give them credit towards IDR Forgiveness and Public Service Loan Forgiveness for past repayment, deferment, and forbearance periods. The department is starting with borrowers’ who applied for the PSLF Waiver. It expects to finish all borrowers by July 1, 2023. Read more about the IDR Waiver.

Federal student loan borrowers have four income-driven repayment plans to choose from:

• Income-Based Repayment Plan (IBR plan)

• Income-Contingent Repayment Plan (ICR plan)

• Pay As You Earn Plan (PAYE plan)

• Revised Pay As You Earn Plan (REPAYE plan)

You can switch to one of the IDR plans by submitting an income-driven repayment plan request form to your loan servicer.

Related: What is the Difference Between REPAYE and PAYE?

President Biden shared details of a new IDR plan he wants the Education Department to implement before he leaves the White House. The plan would define discretionary income more generously, cut in half the amount of income included in student loan payments, and forgive undergraduate loans 10 years after a borrower leaves school.

All borrowers with loans in good standing qualify for at least one of the income-driven repayment plans, but some plans are off-limits depending on the borrower’s income and the type of loans they have. Defaulted federal student loan debt can’t be repaid under any IDR plan until the default status is removed.

For example, you must have a partial financial hardship to qualify for the IBR or PAYE plans. There’s a lot of math that goes into this calculation, but it boils down to this: You have a financial hardship if your monthly payments under those plans would be lower than the payments would be under the 10-Year Standard Repayment Plan.

Your monthly payment amount is tied to your adjusted gross income, family size, loan balance, and interest rate. The more money you make, the fewer children you have, and the lower your loan balance, the less likely it is that you’ll have a partial financial hardship.

Similarly, the PAYE and REPAYE plans are open only to people who borrowed Direct Loans to pay for their college education. Parents who borrowed federal loans to cover their children’s education costs can never repay their Parent PLUS Loans under those plans — even if they roll them into a Direct Consolidation Loan. Parent borrowers can only use the IDR Plan that leads to the highest monthly payment: income-contingent repayment.

Related: Income-Driven Repayment for Private Student Loans

IDR eligibility requirements

• IBR – You must have a partial financial hardship and loans made through the Direct Loan or Federal Family Education Loan Programs, including Stafford Loans (both subsidized and unsubsidized) and Grad Plus Loans. Perkins loans are eligible for the plan if they’re consolidated.

• ICR – Open to all borrowers except those with Parent PLUS Loans or Perkins Loans. Both loan types are eligible for this repayment option if consolidated. But parent loans must be added to a Direct Consolidation Loan to qualify. If you previously consolidated a parent loan into an FFEL Loan, you’ll need to submit a new loan consolidation application with the Education Department before accessing the ICR plan.

• PAYE – Open to new borrowers with Direct Loans. You would be a new borrower if the first time you borrowed a federal student loan was on or after Oct. 1, 2011. You’re also a new borrower if you took out a loan after Oct. 1, 2007, and didn’t have an outstanding balance on a federal loan when you applied for more financial aid. Parent PLUS Loans can never be repaid under the PAYE plan. Perkins loans are eligible for the play if they’re consolidated.

• REPAYE – Open to borrowers with Direct Loans, but not Parent PLUS Loans or consolidation loans that paid off Parent PLUS Loans. Perkins loans are eligible for the play if they’re consolidated.

IDR plans offer similar benefits. They tie your monthly student loan payment to your discretionary income, stretch your repayment period to 20-25 years, and forgive your remaining balance after you’ve made your last qualifying payment.

The simplest way to choose a plan is to let your servicer put you in the one that gives you the lowest monthly payment. I don’t recommend you do this. What you gain in simplicity, you lose in control — and that may be exactly what you need to get the best long-term plan for your situation. Far too often, servicers put borrowers into the wrong student loan repayment plans, costing them a shot at forgiveness programs and adding interest to their balance.

Here’s the general framework I use to choose an IDR plan for my clients:

• If they have Parent PLUS Loans, consolidate those loans into a Direct Loan to take advantage of the ICR plan. If that payment is too high, we’ll use the Loan Simulator on the Federal Student Aid site, StudentAid.gov, to estimate their bill under the Graduated or Extended Repayment Plans. We’ll typically stay in one of those payment plans until their annual income drops due to retirement or job loss. Once that happens, we’ll switch to the ICR plan.

• If they’re married and file taxes separately, pick the PAYE or IBR plan. Their spouse’s income won’t affect their monthly payment.

• If they’re married and file a joint tax return, pick the PAYE or REPAYE plan. Their spouse’s income will affect their payment amount, but it will be lower than it would be under the other plans.

• If they’re single, pick the PAYE or REPAYE plan. The PAYE Plan is the better choice of the two — it wipes out your debt after 20 years of payments and reduces the interest that gets added to your balance — but it’s only open to people who started college after 2011.

Related: Parent PLUS Loan Repayment Options

I also check whether they borrowed loans only for their undergraduate studies. If that’s the case, their repayment term can be 20 years rather than 25 years, depending on the payment plan.

You can apply for an IDR plan online at StudentAid.gov or submit a paper application to your loan servicer. You’ll need to provide income information for you and your spouse if you’re married. You can use the adjusted gross income (AGI) found on your tax return, pay stub, or other proof of income.

The benefit of applying online is that you can use the IRS’s data retrieval tool to pull the AGI from your most recent federal income tax return. Otherwise, you must upload, fax, or mail that information to your servicer.

Keep in mind that you’ll need to recertify your income and family size every year. Also, if you’re currently repaying your loans under a different repayment plan, your servicer may apply a forbearance to your account while it’s working on your request.

UP NEXT: How to Apply for Student Loan Forgiveness