Your Guide to Income-Driven Student Loan Repayment Plans

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Federal student loans are a unique form of borrowing, with several advantages over most types of loan products. To name a few, federal student loans may be eligible for loan forgiveness programs such as Public Service Loan Forgiveness (PSLF), and they make it fairly easy to defer repayment if you fall on difficult financial times. And if you have subsidized loans, the government will even pay your interest while you're in school.

In addition, federal student loans are generally eligible for income-driven repayment, which can make repayment far more affordable for low- to moderate-income borrowers by limiting their monthly loan payments. Here's a guide to what you should know about income-driven repayment, what it could mean for you, and how to apply for it.

What is income-driven repayment?

Income-driven repayment refers to certain repayment plans that are available to federal student loan borrowers. Income-driven repayment, or IDR, plans, are designed to make student loan repayment more affordable by limiting monthly payments to a certain percentage of a borrower's income.

Income-driven repayment plans

There are currently four different income-driven repayment plans, each with different qualifications and repayment terms. Here's a brief rundown of what borrowers should know about each one:

Pay As You Earn (PAYE): The Pay As You Earn plan caps your student loan payment at 10% of your discretionary income, although it will never be more than it would be under a standard 10-year repayment plan. Under the PAYE plan, any remaining loan balance is forgiven after a 20-year repayment period. In order to qualify, you need to have been a new borrower on or after Oct. 1, 2007 and must have received at least one student loan disbursement on or after Oct. 1, 2011.

Revised Pay As You Earn (REPAYE): This is similar to the PAYE plan, although it was created for borrowers who didn't initially qualify based on the dates their loans were disbursed. Like the PAYE plan, the REPAYE plan caps borrowers' monthly loan payments at 10% of discretionary income. One key difference is the repayment period -- like PAYE, any remaining balance is forgiven after 20 years unless any of the loans being repaid were used for graduate or professional study, in which case the repayment period is 25 years.

Income-Based Repayment (IBR): The IBR plan caps monthly payments at 15% of discretionary income for borrowers who took out their first loan before July 1, 2014, or 10% for those who were new borrowers on or after that date. The maximum repayment period under IBR is 20 years for new borrowers as defined by that date, or 25 years for those who are not considered new borrowers.

Income-Contingent Repayment (ICR): The ICR plan limits borrowers' monthly payments to the lesser of 20% of discretionary income or the payment on a 12-year fixed-payment plan. Under the ICR plan, any remaining balance is forgiven after a 25-year repayment period. While the other income-driven plans are generally better for those who qualify, it's also important to note that this is the only income-driven plan that's available to Parent PLUS Loan borrowers.

Data source: U.S. Department of Education.

It's also important to point out that the repayment period doesn't necessarily mean that 20 or 25 years' worth of actual payments must be made. For example, if a borrower's required monthly payment under their income-driven plan is $0, that time counts toward their repayment obligation.

What is your discretionary income?

As you've probably noticed, the term “discretionary income” appears several times throughout these descriptions. So you may be wondering what “10% of your discretionary income” means.

The Department of Education defines your discretionary income as the difference between your annual income and 150% of the poverty guideline for your family size and state of residence.

For 2019, here are the U.S. poverty guidelines for the 48 contiguous states and the District of Columbia:

Data source: Department of Health and Human Services. Alaska and Hawaii have slightly different poverty guidelines which can be found here.

For example, let's say that you live in one of the 48 contiguous states and have a family of four. The Department of Health and Human Services (HHS) says that your 2019 poverty guideline is $25,750. 150% of this amount is $38,625, so any household income in excess of this amount would be considered discretionary income for the purposes of determining your income-driven repayment amount. If your household income is less than this amount, you'd have no monthly payment requirement at all.

How often will your payment change?

Another important thing to point out is that your payment will not be the same throughout your entire repayment period under any of these income-driven repayment plans. In other words, if you apply for income-driven repayment and are given a $300 monthly loan payment under REPAYE, that doesn't necessarily mean that you'll pay $300 per month next year.

Under any of the income-driven plans, you'll need to recertify your income and family size every year, and your payment will be re-calculated each time you do. (Note: You can choose to do this more than once per year if a significant change to your income or family size occurs.)

Pros and cons of income-driven repayment

There are some good reasons borrowers might want to use one of the income-driven repayment plans. Most obviously, it ensures that your monthly student loan payment will be affordable relative to your income. It also sets a maximum amount of time you'll have to make student loan payments. Plus, all four income-driven repayment plans meet the requirements for Public Service Loan Forgiveness (PSLF) if you plan to pursue forgiveness under that program.

On the other hand, many borrowers will end up paying significantly more in interest under an income-driven plan than they would under a standard 10-year repayment plan. It's also important to point out that any balance that is forgiven because you've reached the end of an income-driven plan's repayment period is taxable as income. To be clear, even considering the tax bill, loan forgiveness is definitely a net positive -- just be sure you're prepared for a big tax bill in the year forgiveness occurs.

How to apply for income-driven repayment

The income-driven repayment application process is relatively quick and easy.

• The application is available by logging on to the Federal Student Aid website and takes most people 10 minutes or less from start to finish.
• You'll need to share details about your income from your tax return during the process, but you can link directly to the IRS website from the application and do this quickly and easily.
• If you're married, your spouse will need to certify your income information by logging on to the Federal Student Loan website and using a reference number you'll be given.

As a final caution, there are several third-party companies out there that will offer to help you apply for income-driven repayment, for a fee. To be perfectly clear, applying for IBR is completely free, and is also easy, so there's really no need to pay someone else to do it for you.