Income-Driven Repayment Plans: Is It Right for You?

From student loan payments resuming after their pandemic pause to ongoing inflation, many borrowers are having a tough time managing their monthly finances, leading them to consider income-driven repayment plans as a way to help keep their financial house in order.

There are several options to consider when choosing to take the income-driven repayment plan route for federal loans, so it's important to consider the differences between the various plans, including the pros and cons. And, of course, whether an income-driven repayment plan, in general, is a smart choice for individuals. Bear in mind, also, that changes are coming after July 1, 2024 -- something that borrowers should remember to consider when digging deeper into the details of these plans.

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2. Income-Contingent Repayment (ICR) Plan

Distinguishing itself from other income-driven repayment plans, the ICR is the only one available to those with Direct Consolidation Loans that include a Direct PLUS loan for parents. Similarly, the ICR is the sole option for borrowers with a Direct PLUS Loan for Parents or FFEL Consolidation Loans that include a Direct PLUS Loan for parents, but only if they're both consolidated.

Borrowers can expect monthly payments to be the lesser of 20% of their discretionary income and the amount they would pay on a repayment plan with a fixed payment over 12 years, adjusted according to their income.

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3. Pay As You Earn (PAYE) Repayment Plan

People interested in this plan must be new borrowers on or after Oct. 1, 2007, and they must have received a disbursement of a Direct Loan on or after Oct. 1, 2011 to qualify.

This income-driven repayment plan has borrowers paying Uncle Sam 10% of their discretionary income each month, but payments will never exceed what they would pay under the 10-year Standard Repayment Plan.

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4. Saving on a Valuable Education (SAVE) Plan

Launched in August 2023, the SAVE plan is a new income-driven repayment plan option for borrowers. Borrowers who have Direct PLUS Loans made to students and Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents are eligible.

People with undergraduate loans will have monthly payments of 10% of their discretionary income. Individuals with both undergraduate and graduate loans will pay a weighted average between 5% and 10% of their income based on the original principal balances of their loans.

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FAFSA

FAFSA, or the Free Application for Federal Student Aid, is a form submitted to determine a student's eligibility for federal student aid.

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Cons of income-driven repayment plans

Your education may become more expensive. Depending on what plan they choose, borrowers may end up paying more in interest over the repayment period since they're making smaller monthly payments.
Your low monthly payment may get higher. Just as your monthly payment can decrease if you make less money, you may be shelling out more each month if your income rises.
You may pay more in taxes. Borrowers whose loans are forgiven at the end of the repayment periods may have to pay state taxes on the forgiven amount.

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About the Author

Scott Levine is a contributing Motley Fool stock market analyst covering energy, industrials, technology, and materials. He is also a high school English teacher and a small business owner. He holds a bachelor’s degree in English and creative writing from Binghamton University, a master’s degree in secondary education from Adelphi University, and an advanced certificate in school building leadership from CUNY Queens College. A crossword puzzle enthusiast, he has solved more than 3,100 New York Times puzzles with a 97% solve rate.

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