Income-Driven Repayment for Student Loans: How it Works

Income-driven repayment plans are an option for federal student loans that calculate your monthly payment amount based on how much you earn and your family size. Because the monthly payments depend on your income, payments become more affordable during lean financial times.

You may want to consider an income-driven repayment plan if:

• You can’t afford your monthly federal student loan payment over the long term.

• You took out loans when interest rates were high.

• You’ve recently become unemployed or have reduced income.

• You want to pursue Public Service Loan Forgiveness.

• You’re early in your student loan repayment term.

Related: IDR Waiver & Account Adjustment

* President Biden announced plans to create a new income-driven repayment plan that will reduce monthly payments even further and accelerate loan forgiveness. Details of the SAVE Plan were released in July.

Income-Driven Repayment refers to federal student loan repayment plans that adjust your monthly payment based on your income, family size, and where you live. These plans aim to keep payments manageable for borrowers.

While your state of residence generally won’t impact your monthly payments, there are exceptions. If you’re residing in Alaska or Hawaii, your payments may be adjusted to account for the higher cost of living.

Can you be denied income-driven repayment?

Yes, you can be denied access to income-driven repayment plans. The reason? Not having a partial financial hardship. This is a requirement for certain plans, such as Income-Based Repayment (IBR) and Pay As You Earn (PAYE) plans.

Who’s most likely to face denial? Borrowers with high incomes and small families could struggle to qualify.

But remember, there are alternatives. The Revised Pay As You Earn (REPAYE) and Income-Contingent Repayment (ICR) Plans are still available even if you don’t meet hardship criteria.

Can you qualify for loan forgiveness under an IDR Plan?

Absolutely, loan forgiveness is an option under an Income-Driven Repayment (IDR) plan. Here’s how it works: after making payments for 20 to 25 years, borrowers become eligible for IDR loan forgiveness.

But the timeline can vary. If your loans stem from graduate school, expect to reach forgiveness after 25 years or 300 qualifying payments. For those who borrowed only for undergraduate studies, forgiveness comes a bit sooner, after 20 years, or 240 payments.

Learn More: Who Do You Contact If You Have Questions About Repayment Plans?

Income-based repayment plans adjust your monthly loan payment to 10-20% of your discretionary income, calculated as the difference between your Adjusted Gross Income (AGI) and 100 to 150% of the federal poverty guidelines.

These IDR plans operate in 12-month periods. Each year, you’ll need to recertify, updating any changes in your financial situation. This is done through the Income-Driven Repayment Request, where you certify your current family size and provide updated income details. You can recertify using your tax return, or if your income has dropped significantly, alternative income documents like a pay stub.

Given the high cost of obtaining a college education, income-driven repayment plans are important for federal student loan borrowers who need an affordable monthly payment. IDR Plans allow you have a monthly payment based on what you actually earn. And if you remain in a plan for 20 to 25 years, you may pay only a fraction of what you would have paid under the Standard 10-Year Repayment Plan. However, you may have to pay taxes on the unpaid interest and principal balance that’s forgiven.

Can you do income-based repayment on private student loans? Private student loans don’t offer income-based repayment options. At best, private lenders typically will allow you to have a temporary payment under an interest rate reduction plan or forbearance. If you’re struggling to make the monthly payments on private loans, look into student loan refinancing, negotiating a settlement, or filing student loan bankruptcy.

There are five types of income-driven repayment plans you can apply for:

• Revised Pay As You Earn: the REPAYE plan uses 10% of your discretionary income and offers loan forgiveness after 20 to 25 years. If you’re married and still with your spouse, your monthly payment will be based on your spouse’s income regardless of how you file taxes, or if your spouse has federal loan debt, or if you share finances.

• Pay As You Earn: the PAYE Plan offers borrowers a monthly payment based on 10% of their discretionary income and offers loan forgiveness after 20 years. Married borrowers who file taxes separately and meet the plan’s eligibility requirements will likely find the PAYE Plan the best repayment option.

• Income-Based Repayment: the IBR Plan calculates your monthly payment using 15% of your discretionary income and offers forgiveness after 20 to 25 years of payments. Borrowers with FFEL Program Loans typically choose this IDR plan.

• Income-Contingent Repayment: the ICR Plan calculates your payment using 20% of your discretionary income and offers forgiveness after 25 years. Borrowers with Parent Plus Loans benefit the most from this plan. The ICR Plan is great for borrowers with Parent Plus Loans.

There’s also the income-sensitive repayment plan for FFELP Loan borrowers. The ISR Plan allows borrowers to agree with their loan servicer/guaranty agency to pay 4 to 25% of the borrower’s gross income for a specified repayment term.

All federal student loans are eligible for IDR Plans. However, some loans aren’t eligible for all plans.

Most loans made under the Direct Loan Program qualify for all of the IDR Plans. That includes Direct Subsidized and Direct Unsubsidized Loans and Direct Plus Loans. But Parent Plus Loans and Direct Consolidation Loans that paid off a Parent Plus Loan qualify only for the ICR Plan. Parent Plus Loans aren’t eligible for REPAYE, PAYE, or IBR.

Most loans made under the Federal Family Education Loan Program (e.g., Stafford Loans) qualify for the IBR and ICR Plans. However, FFELP Parent Plus Loans qualify only for the ICR Plan.

Note: FFEL Program Loans are ineligible for the Public Service Loan Forgiveness Program. So if you work in public service and want to qualify for PSLF, you’ll need to qualify your FFEL Loans into a Direct Consolidation Loan.

Federal Perkins Loans are ineligible for all IDR Plans. But if you consolidate them, the consolidation loan would be eligible for income-based repayment options.

Student loan servicers will set payments based on your discretionary income. All servicers use a standard formula to determine this amount. So it’s easy to calculate yours with some basic information.

To determine your discretionary income, look for the difference between your adjusted gross income (AGI) and 100 to 150 percent of the federal poverty level for your family size and where you live.

You can use the Department of Education’s Loan Simulator to estimate your monthly payment under each plan.

Related: How Income-Based Repayment is Calculated

Choosing to pay your federal loans under an income-driven repayment plan will give you an affordable monthly payment. But it can affect other parts of your life.

Which income-driven repayment plan has the lowest interest? The IDR Plan you choose does not determine your interest rate. The loans you’re paying under an IDR Plan control your interest rate. Having said that, the Revised Pay As You Earn Plan offers borrowers an interest subsidy, whereby the federal government will cover some of the interest that accrues on your subsidized and unsubsidized Direct Loans.

How does income-driven repayment change when you get married? When you get married, your monthly student loan payment under an income-driven repayment may change depending on how you file taxes and which payment plan you’re in. The IBR Plan will count your spouse’s income if you file your tax return jointly. Meanwhile, the REPAYE Plan will count your spouse’s income no matter if you file taxes jointly or separately.

Does income-driven repayment affect credit score? Income-driven repayment plans don’t affect your credit score because you’re getting a new loan, changing your loan balance, or opening a new credit account. But being in an IDR Plan can make it harder to qualify for a home loan because your outstanding balance will grow over time with accrued interest.

Is IBR forgiveness for real? Student loan forgiveness under the IBR plan after 20 to 25 years of payments is real. The federal government will forgive the remaining balance on your loans after making 20 to 25 years of payments under an income-driven repayment plan.

Borrowers can apply for income-driven repayment by submitting the IDR application, Income-Driven Repayment Plan Request. You can submit the application online at Federal Student Aid or using a paper application.

You’ll need to submit proof of your current taxable income with your IDR application. Proof of annual income includes:

• most recent federal income tax return filed in the past 2 years

• a recent pay stub

• an unemployment benefits statement

• a letter stating your current gross monthly income (self-employed borrowers)

• a statement of retirement income

• a dividends statement

What is the max income for income-based repayment?

No, there is no maximum income limit for income-based repayment options. Eligibility for specific plans like the IBR or PAYE, however, requires that these plans offer lower federal student loan payments than a 10-year Standard Repayment Plan would.

So, while high income isn’t a disqualifier, it could influence which plans offer you the most benefit.

You’ll send your completed Income-Driven Repayment Plan Request Form to each loan servicer handling your federal student loans. You have four options to send your IDR Request:

• Studentaid.gov: Allows you to estimate your monthly payments and then complete the IDR application after you log in using your FSA ID.

• Online: Most loan servicers allow you to upload your IDR Request and supporting income documentation (federal income tax return, pay stub, etc.) on their website.

• Fax: If you fax your IDR paperwork to your loan servicer, call your servicer to confirm they received the application and that it’s legible. Don’t rely on the fax confirmation.

• Mail: Call your loan servicer a few days after you mail your IDR paperwork to make sure your application was received. Also, if you’re submitting your paperwork for your annual deadline, make sure you put your paperwork in the mail early. You don’t want to miss the deadline because your paperwork got lost in the mail.

If income-driven repayment doesn’t work for you because your income is too high or you’re worried about student loan interest capitalization, there are other options to reduce your monthly loan payments. Those options include:

• Graduated Repayment Plan: loan payments start out low and increase every two years for the next 10 to 30 years, depending on your loan balance and whether you have a consolidation loan.

• Extended Repayment Plan: loan payments are stretched up to 25 years, thereby reducing your monthly payment but ultimately increasing the total interest paid.

• Student Loan Refinancing: private lenders can offer better interest rates than the federal government, but refinancing federal student loans with a private lender eliminates federal benefits like deferment, forbearance, income-based repayment, loan forgiveness, etc. However, if you have a steady income and an aggressive plan to pay off your student loan debt, student loan refinancing maybe your best option.

Choosing the best income-driven repayment plan for your unique financial situation can be challenging. Over the years, I’ve helped thousands of people develop a repayment strategy to get lower payments so they can meet their financial and personal goals (homeownership, saving, etc.).

Let’s talk if you’d like me to help you do the same. Schedule a call with me today.