Should you apply for an income-driven repayment plan?

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An income-driven repayment plan is a type of federal repayment plan that reduces your student loan payments to a percentage of your income. If you’re struggling with your federal student loan payments, an income-driven repayment plan may be right for you, though there are some caveats to keep in mind before you sign up.

What is income-driven repayment?

Income-driven repayment plans are repayment options offered by the federal government for federal student loans only. With these plans, you’ll pay a percentage of your discretionary income for a set period of time, at which point your remaining balances will be forgiven.

The four most common federal income-driven repayment plans are Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR). Students with federal Direct Loans may qualify for all of the plans, although parents qualify for only ICR, and only if they consolidate those loans.

Each of the four income-driven repayment plans comes with its own monthly payment and terms.

Plan Monthly payment New repayment period Eligible loans
Pay As You Earn (PAYE) 10 percent of your discretionary income 20 years Direct Loans made to students; FFEL loans if consolidated; Perkins Loans if consolidated
Revised Pay As You Earn (REPAYE) 10 percent of your discretionary income 20 years for undergraduate loans, 25 years for graduate and professional loans Direct Loans made to students; FFEL loans if consolidated; Perkins Loans if consolidated
Income-Based Repayment (IBR) 10 percent of your discretionary income if you’re a new borrower on or after July 1, 2014, 15 percent of your discretionary income if you’re not a new borrower on or after July 1, 2014 20 years if you’re a new borrower on or after July 1, 2014, 25 years if you’re not a new borrower on or after July 1, 2014 Direct Loans made to students; FFEL loans made to students; Perkins Loans if consolidated
Income-Contingent Repayment (ICR) The lesser of 20 percent of your discretionary income or the amount you’d pay on a repayment plan with a fixed payment over 12 years 25 years Direct Loans made to students; FFEL loans if consolidated; Perkins Loans if consolidated; Direct Loans made to parents if consolidated

Pros and cons of income-driven repayment plans

Is income-driven repayment worth it? While it may appear that an income-driven repayment plan is a no-brainer for borrowers who are struggling, it’s important to note both the benefits and drawbacks before you apply.

Pros

  • More affordable payment: The average student loan payment is $393, according to Purefy, a student loan refinancing platform. If your budget can’t keep up with that, an income-driven repayment plan can make your life a lot easier. Low-income borrowers could have payments as low as $0.
  • Potential for forgiveness: If you still have a balance at the end of your new repayment term, it’ll be forgiven.
  • No credit score impacts: There’s no credit check required to get on an income-driven repayment plan. The same is not true if you try to get a lower monthly payment by refinancing with a private lender.

Cons

  • Your balance may increase: If your monthly payment ends up being lower than the interest accrued, that interest could be added to your overall loan balance. This may not seem like a big deal if loan forgiveness is on the horizon, but if you ever decide to leave your income-driven repayment plan, you may be stuck with higher payments than what you had originally.
  • You must reapply every year: The Department of Education requires that you recertify your annual income and family size every year to stay on your income-driven repayment plan. If you miss the deadline, you’ll be placed back on the standard repayment plan, and your payment will increase.
  • Complex eligibility: If you have student loans from the Federal Family Education Loan (FFEL) Program or if you’ve taken out a parent loan, you’ll need to consolidate your loans before you can apply for most income-driven repayment plans. There are also other limitations that could impact your options, such as when your loans were disbursed, whether or not you’re married and more.

Should you do an income-driven repayment plan?

Income-driven repayment isn’t right for everyone, but here are some situations where it’s worth considering:

  • Your student loan payments are high compared to your income: Because income-driven repayment is based on your actual income, you could save hundreds of dollars each month by switching plans.
  • You qualify for the Public Service Loan Forgiveness (PSLF) program: Income-driven repayment plans are a requirement for PSLF, which forgives remaining student loan balances for workers in public service jobs after 10 years.
  • You’ve recently lost your job or had your salary reduced: Income-driven repayment plans ask you to recertify your income every year, so your payments could rise or fall depending on what you’re actually earning.
  • You’re near the beginning of your student loan repayment plan: Income-driven repayment will start you on a new repayment plan that typically lasts 20 or 25 years. If you have only a few years or a low balance left on your student loans, it may not make sense to extend that period.

Think carefully about your situation and your goals before deciding to get on an income-driven repayment plan or any other type of repayment plan for your student loans.

Which income-driven repayment plan should I pick?

There are a lot of things to consider when deciding which income-driven repayment plan is right for you. Here are some things to consider as you research the different options that are available:

  • Both the PAYE and REPAYE plans will result in the lowest monthly payment. The IBR plan does as well, but only if you’re a new borrower as of July 1, 2014.
  • If you expect your income to increase significantly, the PAYE and IBR plans cap your monthly payments based on what you’d pay on a 10-year repayment plan. With REPAYE, there is no cap.
  • If you’re married, the REPAYE plan considers both your income and your spouse’s, even if you file taxes separately. This means that your monthly payment could be higher than you expect. The PAYE and IBR plans do include spousal income if you file jointly but not if you file separately.
  • If you have parent PLUS loans, your only option is the ICR plan.

For those who have the choice, it’s best to avoid the ICR plan, because it offers the least amount of relief. Among the others, carefully consider your situation and your goals to determine the best fit for you.

How low should your income be for income-driven repayment?

Income-driven repayment plans base your monthly payment on your discretionary income. For PAYE, REPAYE and IBR plans, this figure is calculated by taking the difference between your annual household income and 150 percent of the federal poverty guideline for your household size and state of residence. If you’re on the ICR plan, it’s 100 percent of the guideline.

If your income is at or below the calculation for the federal poverty guideline, you may not have a monthly payment at all. Even if it’s higher, you may still be able to score a lower payment than what you have right now. You can use the Department of Education’s loan simulator to get an idea of what your payment might be.

How to apply for income-driven repayment

Before you start the application process, consider reaching out to your loan servicer to discuss your options. A representative can help you determine which plan is best suited for your situation.

Once you’re ready, you’ll fill out an income-driven repayment plan request, which you can do online or on paper — you can get the form from your loan servicer. You can either select the repayment plan you want or ask your servicer to run the numbers and place you on the plan with the lowest monthly payment.

In the application, you’ll provide income information that your servicer can use to calculate your monthly payment. Depending on the situation, that may be your tax return or a recent pay stub. If you don’t currently earn an income, this step isn’t required.

Note that if you have more than one student loan servicer, you’ll need to file a request with each one. Once you submit your request, it can take a few weeks for the servicer to process it. During that time, it may choose to put your loans in forbearance — but forbearance is not guaranteed, so consider asking for it if you need immediate help with payments.

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