Are you on a tight budget? Do you already know that when the national pause on student loan payments ends you’ll be faced with monthly payments you can’t afford? Want a solution that leads to affordable payments and potentially even student loan forgiveness?
Well, then you’ll probably want to enroll in one of the income-driven repayment plans! These repayment plans are available to all federal student loan borrowers and base the amount of your monthly payments on your income level.
In other words, if you’re not making enough at work to afford paying hundreds of dollars every month toward your student loan balance, then you don’t have to. On an income-driven repayment plan, your monthly payment could be as low as $0 a month!
Does this sound like the type of repayment plan you need? If so, in this blog post, we’re gonna help you:
- Evaluate the pros and cons of income-driven repayment plans
- Understand the differences between the 4 income-driven repayment plans and how to choose the best one for you
- Learn how to easily apply for an income-driven repayment plan
Let’s get started by discussing a bit more about what makes income-driven repayment plans different from other student loan repayment plans!
What Is an Income-Driven Repayment Plan?
An income-driven repayment plan is a student loan repayment option for borrowers of federal student loans. Typically, these income-driven plans are for student loan borrowers who can’t afford to make fixed payments based solely on the amount of their outstanding student loan balance.
With an income-driven repayment plan, your monthly student loan payments will be capped somewhere between 10-20% of your discretionary income — depending on which repayment plan you choose.
What is discretionary income?
Discretionary income is the amount of income you have left after you pay for necessary expenses, like rent, food, and taxes.
Who is eligible for income-driven repayment plans?
All federal student loan borrowers are eligible for income-driven repayment plans, regardless of when you took out your loans.
Borrowers of private student loans are not eligible for the income-driven repayment plans that we discuss in this blog post. If your private student loan payments are currently too high for your budget, you’ll need to speak with your private lender to discuss repayment options. You may also consider refinancing your student loans.
How much will you pay on an income-driven repayment plan?
As mentioned earlier, with an income-driven repayment plan, the amount of your monthly student loan payments depends on your discretionary income and family size.
You can use the Department of Education’s Loan Simulator to calculate how much your monthly payment could be. But, if you’re on a tight budget, you can expect to pay between $0 and $300 per month on an income-driven repayment plan.
Pros and Cons of Income-Driven Repayment Plans
Income-driven repayment plans can be a great option for many borrowers of federal student loans. But that doesn’t mean they’re the right choice for everyone.
Here are the major pros and cons of income-driven repayment plans to help you decide if choosing one of these repayment plans is the right move for you.
Pros of income-driven repayment plans
- Your monthly payment is based on your income, family size, and loan balance so you can afford to pay what you owe. That means your monthly payment could be as low as $0/month.
- You’ll be less likely to make late payments and risk student loan default since you’ll be able to make affordable payments.
- Your student loan balance is forgiven after 20-25 years of regular payments.
Cons of income-driven repayment plans
- You may end up paying more interest on your student loan in the long run.
- You may have to pay income tax on the amount of debt that is forgiven at the end of your repayment period.
- If you’re married, your spouse’s income will get factored into how much you need to pay monthly.
- Your monthly payment can still be more than you can afford, so it’s important to make sure you choose the right plan for your financial situation.
Overview of the 4 Income-Driven Repayment Plans
The Department of Federal Student Aid currently offers federal student loan borrowers the option to choose one of four income-driven repayment plans:
- Income-Based Repayment (IBR)
- Revised Pay As You Earn (REPAYE)
- Pay As You Earn (PAYE)
- Income-Contingent Repayment (ICR)
Each plan has different eligibility requirements, terms, and conditions. So, let’s look at the specific details of each one to help you begin considering which plan may be best for you.
Income-Based Repayment (IBR)
Under this repayment plan, your monthly payment would be 10% of your discretionary income if you borrowed on or after July 1, 2014, or 15% if you borrowed before then. Your monthly payment would also never be more than what you would pay with the Standard Repayment Plan.
With the Income-Based Repayment Plan, you’ll qualify for student loan forgiveness after 20-25 years of regular payments.
The IBR Plan is only available for borrowers with:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans made to graduate or professional students
- Direct Consolidation Loans that did not repay any PLUS loans made to parents
- Subsidized Federal Stafford Loans (from the FFEL Program)
- Unsubsidized Federal Stafford Loans (from the FFEL Program)
- FFEL PLUS Loans made to graduate or professional students
- FFEL Consolidation Loans that did not repay any PLUS loans made to parents
Revised Pay As You Earn (REPAYE)
Under the REPAYE Repayment Plan, your monthly payment would be 10% of your monthly discretionary income.
The repayment period for the REPAYE Repayment Plan is 20 years for undergraduate student loans and 25 years for graduate student loans. At the end of that repayment period, your remaining loan balance becomes eligible for student loan forgiveness.
The REPAYE Plan is only available for borrowers with:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans made to graduate or professional students
- Direct Consolidation Loans that did not repay any PLUS loans made to parents
Pay As You Earn (PAYE)
The Pay As You Earn (PAYE) Repayment Plan is almost the same as the REPAYE Repayment Plan.
The PAYE Repayment Plan caps your monthly student loan payment at 10% of your discretionary income. However, this income-driven repayment plan is only available to borrowers who have demonstrated they can’t afford to make monthly payments under the Standard Repayment Plan.
The repayment period for the PAYE Repayment Plan is 20 years. At the end of that repayment period, your remaining loan balance becomes eligible for student loan forgiveness.
The PAYE Repayment Plan is only available for borrowers with:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans made to graduate or professional students
- Direct Consolidation Loans that did not repay any PLUS loans made to parents
Income-Contingent Repayment (ICR)
The Income-Contingent Repayment caps your monthly payment amount at whichever of the following two options is less:
- 20% of your discretionary income
- The amount of a fixed payment over 12 years, adjusted according to your income.
The repayment period for the Income-Contingent Repayment Plan is 25 years. At the end of that repayment period, the remaining balance becomes eligible for student loan forgiveness.
The ICR Plan is only available for borrowers with:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans made to graduate or professional students
- Direct Consolidation Loans that did not repay any PLUS loans made to parents
- Direct Consolidation Loans that repaid PLUS loans made to parents
Note on Student Loan Forgiveness from Income-Driven Repayment Plans
Your federal student loan balance is forgiven if you haven’t fully repaid your loans at the end of the loan repayment period for all four income-driven repayment plans.
But, as we mentioned earlier in the pros and cons section, you may still need to pay tax on that forgiven debt. Currently, there is a rule that any student loan debt that is forgiven after 2025 is counted as taxable income. If your forgiven balance is high, the tax you’ll owe could be a lot more than you were expecting.
Some potentially good news: Congress is working on legislation to eliminate income tax on forgiven student loans, but it’s not in place yet.
How to Apply for an Income-Driven Repayment Plan
To apply for an income-driven repayment plan, you’ll need to submit an application to the Department of Education’s Federal Student Aid office.
When completing your application, you’ll need to have the following materials:
- Your Social Security number
- Your driver’s license number
- The total amount you borrowed in student loans
- The name of the school(s) you attended using your loans
- The dates you attended school
- Proof of your current income
- Information about your spouse’s income, if applicable
What to do after applying
To remain eligible for income-driven repayment plans, you’ll need to recertify your income every year. So, after applying for and getting approved, set a reminder on your calendar to do this. If your income changes or you no longer meet the eligibility requirements for your current income-driven repayment plan, you can switch to a different plan.
Final Thoughts
Income-driven repayment plans are a great way to make your student loan payments more affordable. But each plan has its own eligibility requirements, pros, and cons. So, it’s important to do your research and make sure you choose the repayment plan that’s best for you. We hope the information we’ve shared in this blog post helps you do exactly that.
You can also save yourself a ton of time by signing up for Scholly PayOff! What’s that? It’s our way of helping you find and enroll in the best income-driven repayment plan to lower your monthly student loan payments. With PayOff, you can get your application approved in as little as 10 days – 4x faster than the traditional enrollment process we described above!
You can also learn more about how to pay off your student loans by checking out the following resources: