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What is income-driven repayment?

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Income-driven repayment plans are an option for federal student loans that use your income and family size to determine your monthly payment. Because the monthly payments depend on your income, payments often become much more affordable during lean financial times.

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.

Most income-driven repayment plans have 20- or 25-year terms. 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, but the U.S. Department of Education recently revoked this requirement for any loan amounts forgiven through 2025. Some experts believe that this will become a permanent feature of income-driven repayment plans.

How does it work?

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

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 where the loan payments are based on the joint income of married borrowers, resulting in a higher monthly bill. To avoid this, you’ll have to sign up for a plan like PAYE, which will use only your income as long as you and your spouse file separate federal income tax returns.

Is income-driven repayment a good idea?

Income-driven repayment can be a good idea for those with high loan balances and low incomes. It’s also a smart strategy for borrowers who are struggling with their payments but want to avoid entering deferment or forbearance.

If you’re thinking about signing up for an income-driven repayment plan, consider your main goal. If you want to pay off your loans quickly, or if you’re near the end of your repayment period, an income-driven repayment plan may be a bad choice. But if you need some relief from your monthly payments and don’t mind a longer repayment period, an income-driven repayment plan may make more sense than a standard plan.

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’ve just begun your student loan repayment term.

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 PLUS loans
Income-Sensitive Repayment (ISR) 4% to 25% of gross monthly income 10 years FFEL loans If you want a short repayment timeline

Which income-driven repayment plan should you choose?

The best income-driven repayment plan depends on your particular financial situation and the type of loans you have. If you have FFEL loans, for instance, your only options without consolidating are the Income-Based Repayment Plan and the Income-Sensitive Repayment Plan. If you’re a parent who took out a loan for your child’s education, your only option is the Income-Contingent Repayment Plan.

If you have Direct Loans, the choice is trickier, since more options are available to you. Because there’s no one right answer for everyone, you should use the U.S. Department of Education’s loan simulator to see which repayment plan makes sense for you. When you input your loan amount, income and family size into the calculator, you’ll see which plan results in the lowest monthly payment.

How much you’ll pay on income-driven 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 either 100 or 150 percent of the federal poverty level for your family size and where you live. Most income-driven repayment plans use the 150 percent limit, though Income-Contingent Repayment uses 100 percent.

Here’s an example based on 150 percent of the federal poverty level.

Imagine your adjusted gross income is $45,000 and you live in Indianapolis, Indiana. In 2022, 150 percent of the poverty guideline is $20,385 for a family of one in Indianapolis. The difference between your AGI and this amount is $24,615. That’s your discretionary income.

If you paid 10 percent of this amount under an income-driven repayment plan, you would pay $2,461.50 for the year and $205.13 per month.

Let’s see how that math changes if you have three kids. If you’re a family of four, 150 percent of the 2022 poverty guideline works out to $41,625. The difference between this amount and your AGI is only $3,375. If you owed 10 percent of this amount on an income-driven repayment plan, you would only pay $337.50 on your student loans for the year. That’s only $28.13 per month.

How to apply for income-driven repayment

If you’ve decided to pursue income-driven repayment, you’ll have to request the change with your loan servicer. Here’s how:

  1. Determine your options: Reach out to your loan servicer and 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. You can decide which plan is right for you using the U.S. Department of Education’s loan simulator or by asking your loan servicer to identify the most appropriate income-driven plan (or plans) for your individual situation.
  2. Submit a request: Once you’ve decided what kind of income-driven repayment plan you want, 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. When submitting the application, you’ll need to provide income information.
  3. Repeat with all loan servicers: If you hold loans with multiple servicers, you must repeat this process with each of them.
  4. Keep making payments: It generally takes a few weeks for your servicer to make a decision regarding your income-driven repayment application. In the meantime, keep making your regular payments to avoid falling into default.

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 income-driven repayment plans and loan forgiveness programs, it’s possible to lower your monthly payment by getting a lower interest rate.

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 taxes 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 would pay with the standard 10-year plan.

How are income-driven repayment plans changing?

President Biden’s administration has been exploring a few changes to income-driven repayment plans. The biggest change to the plans is that between 2021 and 2025, borrowers who have their balance forgiven on an income-driven repayment plan will not owe taxes on the forgiven amount. Previously, borrowers could be met with a large tax bill at the end of their repayment period.

The Department of Education is also considering a new income-driven repayment plan, currently called Expanded Income-Contingent Repayment (EICR). EICR would cover only undergraduate loans, but it would introduce a marginal approach to payment calculations. With the new plan, any discretionary income that falls below 200 percent of the federal poverty line would not be charged. Discretionary income between 200 and 300 percent of the federal poverty line would be charged 5 percent, and discretionary income above 300 percent of the federal poverty line would be charged 10 percent. Borrowers would make these payments for 20 years.

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Written by
Holly D. Johnson
Author, Award-Winning Writer
Holly Johnson writes expert content on personal finance, credit cards, loyalty and insurance topics. In addition to writing for Bankrate and CreditCards.com, Johnson does ongoing work for clients that include CNN, Forbes Advisor, LendingTree, Time Magazine and more.
Edited by
Student loans editor