Published in: Student Loans | Oct. 25, 2019

Should You Join the 2.8 Million Grads Who Use Income-Based Repayment?

By:  Kailey Hagen

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Income-based repayment has its perks, but it’s not the best fit for everyone.

Paying back student loans is a struggle for many of the 44.7 million Americans currently carrying them. The federal government offers several repayment options to suit different budgets, and income-driven repayment plans have become some of the most popular because they limit your monthly payments to a certain percentage of your income.

We recently investigated student loan debt in America and found that nearly 7.37 million federal student loan borrowers use one of these repayment plans. The most popular by far was the income-based repayment (IBR) plan, used by 2.82 million people -- about 40% of those on an income-driven repayment plan.

But is IBR the best option for you? Here’s a closer look at IBR and three other types of income-driven repayment plans.

A male college student working in the library on his laptop.

Image source: Getty Images

Income-based repayment (IBR) plan

The IBR plan limits your monthly payments to 10% of your discretionary income, which is defined as the difference between your annual income and 150% of the poverty guideline for your state and family size.

If you took your student loan out before July 1, 2014, you could pay as much as 15% of your discretionary income per month. Your loan servicer recalculates your monthly payment every year and you must update your income and family size information annually. If you get married and file joint taxes with your spouse, your loan servicer will consider both of your incomes when determining your monthly payments.

All federal Direct loans, including Direct Consolidation and Direct PLUS Loans made to students, are eligible for IBR. Under this plan, as with all income-driven repayment plans, you’ll pay more overall than you would if you’d stuck to the standard 10-year repayment plan. But the government automatically forgives any amount left over after 20 years (25 for loans taken out before July 1, 2014), although you'll owe taxes on the forgiven amount.

Revised Pay as You Earn (REPAYE) plan

The REPAYE plan is the second most common plan after the IBR, with 2.56 million borrowers choosing this route. It’s similar in many ways to the IBR, but there are a few key differences.

First, regardless of when you took out your loan, your monthly payments are capped at 10% of your discretionary income and the government automatically forgives any amount left over after 20 years, unless it was for a graduate program. In that case, it will forgive any amount remaining after 25 years. You'll owe income tax on the forgiven amount.

You must submit new income and household data every year and your loan servicer will update your payments accordingly. If you’re married, your loan servicer will consider your spouse’s income when calculating your household’s discretionary income regardless of whether you file taxes jointly or separately.

The REPAYE plan is the smarter option if you took out a loan before July 1, 2014, and you’re trying to reduce your monthly payments. You’ll only have to pay 10% of your discretionary income with REPAYE compared to 15% with IBR. But married couples with student loans who plan to file separate taxes may get a more affordable payment plan with the IBR because it doesn’t consider your spouse’s income unless you file joint taxes.

Pay as You Earn (PAYE) plan

The PAYE plan also has much in common with the IBR, although it’s far less popular, with only 1.31 million graduates choosing it. To qualify for this repayment plan, you must have taken out your loan on or after Oct. 1, 2007, or have received a disbursement of a Direct loan on or after Oct. 1, 2011. 

It also limits your payments to 10% of your discretionary income, not to exceed what you’d pay under the standard repayment plan, and it will forgive any outstanding balance after 20 years. You must pay taxes on the forgiven amount. It’s also a better choice for some married couples than REPAYE because it only considers your spouse’s income if you file joint taxes. You must update your income and household information annually.

PAYE is worth considering if you took out a student loan between Oct. 1, 2007, and July 1, 2014. This renders you eligible for PAYE and lets you pay less per month than the 15% of your discretionary income you’d pay with IBR.

It’s also a smarter choice than REPAYE for graduate students, because PAYE automatically forgives any outstanding balance after 20 years regardless of whether it was for an undergraduate or graduate degree. Married couples filing separate taxes may also get lower payments with PAYE than with REPAYE.

Income-contingent repayment (ICR) plan

Only 680,000 borrowers have chosen the income-contingent repayment (ICR) plan, and it’s easy to see why it’s so unpopular.

Its payment cap is more complicated than the other income-driven repayment plans. You’ll pay the lesser of 20% of your discretionary income -- which, for this plan, is the difference between your annual income and 100% of the poverty guideline for your state and family size -- or the payment you’d make if you had a 12-year fixed repayment plan.

You’ll also have to wait 25 years for your loan servicer to forgive any outstanding balance. If you’re married, your loan servicer will only consider your spouse’s income if you file joint taxes.

So why would anyone choose this plan when its terms appear to be less favorable than the other income-driven repayment plans? Part of the reason is that the ICR is the only income-driven repayment plan that’s available to parents who have taken out Direct PLUS Loans on behalf of their children. If they’re unable to keep up with the standard repayment plan, they can consolidate their Direct PLUS Loans into a Direct Consolidation Loan and switch to an ICR so that their payments are tied to their income. 

Which income-driven repayment plan is best for you?

It’s impossible to say that one income-driven repayment plan is superior to the others because it depends on how much you owe, how much you’re earning, and your household size. Before signing up for an income-driven repayment plan, talk to your student loan servicer about all of these options to see what they can offer you.

It’s tempting to choose the one that offers the lowest monthly payment, but this will increase how much you pay overall and how much the government forgives, which will raise your taxes that year. Look for the plan that offers the largest monthly payment you can comfortably afford to minimize how much you pay overall.

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