There are 7.37 million federal student loan borrowers who are enrolled in income-driven repayment plans, according to the U.S. Department of Education. While this may sound like a lot of people, and it is, it represents just 17% of the 42.8 million total federal student loan borrowers.
If you're making standard monthly payments, or are participating in the extended, graduated, or extended graduated repayment plans, here's why you might want to seriously consider applying for income-driven repayment, even if you don't think you need it or will qualify.
The benefits of income-driven repayment
It's not difficult to see why income-driven repayment is so popular. For one thing, it keeps your student loan payments as low as possible while you still get credit for making full monthly payments.
In other words, if you anticipate eventually qualifying for Public Service Loan Forgiveness (PSLF), which requires 120 monthly payments, the payments you make under an income-driven repayment plan will count. Certain other repayment plans designed to keep your payments low, such as the extended and graduated repayment plans, don't count towards PSLF.
Speaking of loan forgiveness, even if you don't anticipate being eligible for PSLF, it's important to mention that if you repay your loans under an income-driven plan, any remaining balance is automatically forgiven after paying for 20 or 25 years under the plan. I'll get into the specifics in the next section, but the point is that if you're concerned about "paying your student loans forever," there's a definitive time limit to how long you'll pay under income-driven repayment plans.
Four income-driven repayment plans
There are currently four income-driven repayment plans that you can qualify for. Most borrowers will find that they fit under one of the first two on this list, but here's a rundown of all four:
Pay As You Earn (PAYE): This plan typically results in the best terms for borrowers who qualify. Under the PAYE plan, your payment is capped at 10% of your discretionary income and any remaining balance is forgiven after a 20-year repayment period. However, to qualify for PAYE, you must have been a new student loan borrower after Oct. 1, 2007 and must have received at least one loan disbursement after Oct. 1, 2011.
Revised Pay As You Earn (REPAYE): Simply put, the REPAYE plan was designed for borrowers who didn't qualify for PAYE. In full disclosure, this is the student loan repayment plan that I'm on. Under REPAYE, the borrower's payment is limited to 10% of his or her discretionary income. Loans can be forgiven after 20 years of repayment, but if any of the loans were taken out for graduate study, the repayment period before loan forgiveness is extended to 25 years.
Income-Based Repayment (IBR): This plan caps monthly payments at 15% of discretionary income for borrowers who obtained their first loan before July 1, 2014, or 10% for new borrowers on or after that date. Any remaining balance is forgiven after 25 years for newer borrowers or 20 years for older borrowers as defined by that cutoff date.
Income-Contingent Repayment (ICR): ICR limits the monthly loan payment to 20% of discretionary income or whatever the payments would be on a 12-year fixed repayment plan, whichever is lower. This is obviously not as generous as the other plans, but it's the only income-driven plan available to Parent PLUS Loan borrowers. The remaining balance is forgiven after 25 years of payments.
How to apply for income-driven repayment
The application process for income-driven federal student loan repayment plans is pretty straightforward. Simply log on to the Federal Student Aid portal and from there it takes less than 10 minutes for most people to complete the application. You'll need to share tax return information, but the application makes it easy to link directly to the IRS website to import your information.
It's also important to mention that you don't decide which specific plan you will apply for. Your information will be analyzed and you'll automatically be put into the income-driven plan that results in the lowest student loan payment for you.
There's no reason not to apply
As a final thought, I'd strongly advise you to apply for income-driven repayment even if you don't think you'll qualify. You might be surprised at how high your income could be while still benefiting from an income-driven plan, and no matter how much you make, your payment will never be greater than it would be under the standard 10-year repayment plan. And applying is easy to do. In other words, you have nothing to lose by applying, and a whole lot to gain.None