The Complete Guide to Income-Driven Repayment Plans for Federal Student Loans

Student loan debt can feel like a huge burden, especially if your monthly payments are outrageously high. In some cases, your student loan payments may even be more than your rent.

How are you expected to manage? Luckily, there are ways to make your monthly student loan payments more reasonable. If you have federal student loans, you can look into an income-driven repayment plan (sorry, private loan borrowers).

Income-driven plans, which include the Income-Based Repayment plan, base your monthly payments on your income, making payments more affordable than a Standard 10-year plan.

But with acronyms like IBR, ICR, PAYE, and more, choosing a plan can be a little overwhelming and confusing. We’re here to break it down for you, so you can decide which option is the best for you.

1. Income-Based Repayment (IBR)

Income-Based Repayment, which is commonly referred to as IBR, caps your monthly payments based on a certain percentage of your discretionary income. This plan is a good option for borrowers who are struggling with monthly payments and need something more manageable.

Eligible loans:

  • Direct Loans (both Subsidized and Unsubsidized)
  • Direct PLUS Loans (loans made to parents are ineligible)
  • Direct Consolidation Loans
  • Federal Stafford Loans (both Subsidized and Unsubsidized)
  • FFEL PLUS Loans made to graduate or professional students (FFEL PLUS loans made to parents are ineligible)
  • FFEL Consolidation Loans qualify for Income-Based Repayment
  • Federal Perkins Loans (if consolidated)

Note that nearly all federal loans are eligible for Income-Based Repayment, with the key exception that loans provided to parents are not. However, here’s the more important part: in order to qualify for IBR, your prospective payment must be lower than what it would be on the Standard Repayment Plan, and you must demonstrate financial need based on your income (more on that later).

Payment amount: 10 – 15 percent of discretionary income, depending on the date of the first loan.

Repayment period: 20 – 25 years.

Pros: IBR lowers monthly payments. Also, loans are eligible for forgiveness if borrowers carry a balance after the repayment period is complete.

Cons: Borrowers can end up paying more in interest over time. In addition, current IRS tax regulations may consider forgiven loans taxable income, which means that borrowers could be hit with a hefty tax bill.

2. Pay As You Earn (PAYE)

Pay As You Earn is one of the newest income-driven plans to help borrowers manage their student loans. Unveiled in 2012, this plan is similar to IBR but has stricter requirements.

To qualify for PAYE, you need to demonstrate need and be a fairly recent borrower — you must be a new borrower as of Oct. 1, 2007 (meaning you didn’t have any student loans before this time) and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011.

There are plans to expand the Pay As Your Earn program so more students will become eligible. The Revised Pay As You Earn plan (REPAYE) would likely include all borrowers, regardless of when they took out their loans. It includes other provisions, too. We’ll keep you posted as changes take effect.

Eligible loans:

  • Direct Loans (both Subsidized and Unsubsidized)
  • Direct PLUS Loans (loans made to parents are ineligible)
  • Direct Consolidation Loans

Eligible only if consolidated:

  • Federal Stafford Loans (both Subsidized and Unsubsidized)
  • FFEL PLUS Loans
  • FFEL Consolidation Loans qualify for Income-Based Repayment
  • Federal Perkins Loans

Just like IBR, to take advantage of PAYE, your prospective payments must be smaller than what your payments would be on a Standard Repayment Plan.

Payment amount: 10 percent of discretionary income.

Repayment period: 20 years.

Pros: Allows for payments that are an even lower percentage of discretionary income. Also, these loans are eligible for loan forgiveness after 20 years.

Cons: You must be a new borrower as of dates above, so not everyone is eligible. As with IBR, forgiven loans may be considered taxable income.

3. Income-Contingent Repayment Plan (ICR)

The Income-Contingent Repayment plan is a bit different from the other two income-driven plans as there is no income eligibility requirement.

But if you don’t qualify for those plans and still want a lower payment, the Income-Contingent Repayment plan is your best option.

Eligible loans:

  • Direct Loans (both Subsidized and Unsubsidized)
  • Direct PLUS Loans (loans made to parents ARE eligible if they are consolidated)
  • Direct Consolidation Loans

Eligible only if consolidated:

  • Federal Stafford Loans (both Subsidized and Unsubsidized)
  • FFEL PLUS Loans
  • FFEL Consolidation Loans qualify for Income-Based Repayment
  • Federal Perkins Loans

Under ICR, your monthly payment is always based on your income and family size and may even be higher than what it would be on a Standard Repayment plan.

Check out this repayment estimator to calculate your monthly payments (you must be logged in.) You’ll want to make sure that ICR is of benefit for you before choosing this plan over a Standard Repayment Plan.

Payment amount: 20 percent of your discretionary income.

Repayment period: 25 years.

Pros: It’s easier to qualify since there’s not an income eligibility requirement. You may also be eligible for loan forgiveness.

Cons: Highest percentage and payment amounts of all income-driven plans. Your payment on ICR may not be lower than what it would be on a Standard Repayment plan. Forgiven loans could be considered taxable income.

Choosing a Plan

Choosing an income-driven repayment plan that is right for you is important It can help you manage your payments. But which one is best for you? Here are some things you should consider before choosing a plan.

  • What will your estimated payments be? Find out here.
  • Will you be able to pay off your loan before the repayment period is over or will you have to have your loans forgiven? Consider the potential tax ramifications of your decision.
  • Do you qualify based on your income and family size?

Going on an income-driven repayment plan may seem like a great way to pay less on your student loans, but you may actually pay a lot more in interest over time. If you can afford it, it makes sense to go with a Standard Repayment Plan.

But, if you’re struggling with payments, an income-driven repayment plan can help relieve borrowers.

How to Apply

To apply for an income-driven plan, submit the Income-Driven Repayment Plan Request form online at StudentLoans.gov. You may also fill out a paper form, which you can get from your loan servicer.

For Income-Based Repayment and Pay As You Earn, you must demonstrate financial need to be eligible. Borrowers can submit their Adjusted Gross Income (AGI) through a federal tax return or online with the IRS Data Retrieval Tool, which syncs your tax information to your application.

If you haven’t filed a tax return or have no income to report, you can provide alternative documentation such as pay stubs and unemployment benefits.

Bottom Line

Income-driven plans can be a great way to reduce your federal student loan payments, but it’s important to look at the long-term benefits and consequences.

On the one hand, these plans can help you in the present, but in the future you may deal with taxable income on forgiven loans and may pay more in interest over time. Be clear on your goals and choose the right repayment plan for you. For more information, check out these Income-Driven Plan FAQs.

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