What is income-driven repayment?

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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.

What is income-driven repayment?

Income-driven repayment plans are a federal student loan repayment option that sets your monthly payment at an amount intended to be affordable based on your income and family size.

While income-driven repayment plans have different repayment periods, most terms are either 20 or 25 years. At that point, any remaining loan amount will be forgiven. In the past, the amount forgiven through an income-driven repayment plan could be treated as taxable income, though the U.S. Department of Education has recently revoked this requirement for any loan amounts forgiven through 2025.

How does it work?

Income-driven repayment plans set your monthly loan payment at a percentage of your discretionary income. The exact percentage depends on the specific plan but generally ranges from 10 to 20 percent of your discretionary income.

Discretionary income is the difference between your annual income and 100 to 150 percent of the federal poverty guidelines, depending on your repayment plan, family size and location.

Keep in mind that some income-driven repayment plans, like REPAYE, have what’s often referred to as a marriage penalty. “This is when the loan payments are based on the joint income of married borrowers, thereby increasing the loan payment,” says Mark Kantrowitz, publisher of PrivateStudentLoans.guru. To avoid this, you’ll have to sign up for a plan like PAYE, which will use only your income if you and your spouse file separate federal income tax returns.

Why is it important?

Income-driven repayment plans are important for federal student loan borrowers who need a lower monthly payment on their loans. Since these plans base your monthly student loan installment on how much you actually earn, the amount you pay may only be a fraction of what you would pay on a standard 10-year repayment plan. Depending on your income and family size, you may not have a monthly payment at all.

Income-driven repayment plans are also a requirement if you plan to pursue Public Service Loan Forgiveness (PSLF) with qualified employment in a public service field. With PSLF, you only need to make 10 years of payments (or 120 payments) on your income-driven repayment plan before having the loan balances forgiven. The amount forgiven is not considered taxable income.

Types of income-driven repayment plans

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

Plan name Payment amount Repayment term Eligible loans Best for
Pay As You Earn (PAYE) 10% of discretionary income 20 years Direct Loans; FFEL Loans and Perkins Loans if consolidated If your income is not projected to increase
Revised Pay As You Earn (REPAYE) 10% of discretionary income 20 years for undergraduate loans, 25 years for graduate loans Direct Loans; FFEL Loans and Perkins Loans if consolidated If you have graduate loans
Income-Based Repayment (IBR) 10% or 15% of discretionary income, depending on loan disbursement date 20 or 25 years, depending on loan disbursement date Direct Loans, FFEL Loans; Perkins Loans if consolidated If you don’t want to consolidate FFEL Loans
Income-Contingent Repayment (ICR) The lesser of 20% of discretionary income or what you would pay on a fixed repayment plan for 12 years, adjusted according to your income 25 years Direct Loans; parent loans, FFEL Loans and Perkins Loans if consolidated If you have parent loans
Income-Sensitive Repayment (ISR) 4% to 25% of gross monthly income 10 years FFEL Loans If you want a short repayment timeline

How to calculate income-based repayment

Loan servicers will set payments based on your discretionary income. All loan 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.

Here’s an example based on 150 percent of the federal poverty level: Imagine your adjusted gross income is $40,000 and you live in Indianapolis, Indiana. You have $45,000 in eligible federal student loans.

According to the U.S. Department of Education, 150 percent of the 2021 poverty guideline is $19,320 for a family of one in Indianapolis. The difference between your AGI and this amount is $20,680. That’s your discretionary income. If you paid 10 percent of this amount under an income-driven repayment plan, you would pay $2,068 for the year and $172.33 per month.

But the math changes if you have three kids. If you’re a family of four, 150 percent of the 2021 poverty guideline works out to $39,750. The difference between this amount and your AGI is only $250. If you owed 10 percent of this amount on an income-driven repayment plan, you would only pay $25 on your student loans for the year. That’s only $2.08 per month.

How to apply for income-driven repayment

The first step in applying for an income-driven repayment plan is contacting your loan servicer to find out what options may be available. Your choices will depend on the type of federal loan you have and when you borrowed the money.

The next step is submitting an Income-Driven Repayment Plan Request. This application can be submitted online or via hard copy. Paper copies of the application can be obtained from your loan servicer.

The application lets you select the specific income-driven repayment plan you want, which you can determine using the U.S. Department of Education’s loan simulator. You can also ask your loan servicer to identify the most appropriate income-driven plan (or plans) for your individual situation and have the servicer put you on the income-driven plan that provides the most affordable monthly payment.

If you hold loans with multiple servicers, you must repeat this process with each of them. Also keep in mind that when submitting an application, you’ll need to provide income information. These details will help the servicer gauge your eligibility for the various programs and calculate your monthly payments.

It generally takes a few weeks for the servicer to make a decision regarding your income-driven repayment application. Keep making your regular payments until you’ve been officially approved for an IDR plan.

Alternatives to income-driven repayment

If an income-driven repayment plan does not work for you, or if you’re not eligible, there are other options to reduce your monthly loan payments. These include:

  • Graduated repayment plan: Under this plan, loan payments start out low and increase every two years. Payments are made for up to 10 years on most loans (up to 30 years on consolidation loans).
  • Extended repayment plan: This approach involves a longer repayment term, which reduces the monthly payment but ultimately increases the total interest paid over the life of the loan. Payments are made for up to 25 years.
  • Student loan refinancing: While refinancing your federal student loans with a private lender will eliminate federal benefits, like the option of income-driven repayment plans or loan forgiveness, it may be worthwhile if you can get a much lower interest rate.

Final considerations

Before you decide to pursue an income-driven repayment plan, double-check that you have the right kind of federal student loans. Direct Subsidized Loans and Direct Unsubsidized Loans qualify for all of the income-driven repayment plans, as do Direct PLUS Loans and Direct Consolidation Loans.

Other types of loans don’t qualify for income-based repayment plans, though you may be able to qualify if you consolidate them with a Direct Consolidation Loan. If you do opt for consolidation, make sure not to consolidate any Direct Loans that are already eligible for income-driven repayment. You’ll lose credit for any payments you’ve already made that will count toward income-driven loan forgiveness.

You can find out more on the U.S. Department of Education’s website.

FAQ about income-driven repayment

Does income-driven repayment include spousal income?

Whether or not your spouse’s income affects your income-driven repayment plan depends on the plan you select.

ICR, IBR and PAYE use only the borrower’s income as long as the borrower files separately. REPAYE, on the other hand, bases the loan payment on joint income, regardless of whether the borrower and their spouse filed separate or joint tax returns.

What is the maximum income for income-driven repayment?

There’s no explicit income cutoff when it comes to qualifying for income-driven repayment plans. The loan payments will simply increase as your income increases. However, if your income increases enough, your income-driven repayment may be greater than what you’d pay with the standard 10-year plan.

How many people get forgiveness through income-driven repayment?

A recent report by the National Consumer Law Center revealed that only 32 student loan borrowers have seen their loans forgiven through income-driven repayment plans in the program’s 25-year history. However, this shouldn’t discourage you from seeking out these programs. The report states that the plans themselves aren’t the issue — but rather a failure on the part of loan servicers to adequately inform borrowers about their options.

If you think you qualify for income-driven repayment, reach out to your servicer directly to request access.

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