The Best Income-Driven Repayment Plans for Your Student Loans | For millions of Americans, student loan debt is a heavy burden that can feel impossible to overcome. The average student loan debt for the class of 2020 graduates was $28,400. With high interest rates and limited options for relief, many borrowers find themselves struggling to keep up with their monthly payments.
However, there is a solution that can provide much-needed relief: income-driven repayment (IDR) plans. These plans are designed to make student loan payments more affordable by capping your monthly payment at a percentage of your discretionary income. If your income is low enough, your payment could even be as low as $0 per month.
In this post, we’ll explore the different income-driven repayment plans available for federal student loans, their eligibility requirements, and how to determine which plan is best for your situation.
What Are Income-Driven Repayment Plans?
Income-driven repayment plans are a type of payment plan offered by the federal government for federal student loans. These plans are designed to make your monthly payments more affordable by basing them on your income and family size. The available IDR plans are:
- Revised Pay As You Earn (REPAYE)
- Pay As You Earn (PAYE)
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
Under these plans, your monthly payment is calculated as a percentage of your discretionary income, which is the difference between your annual income and 150% of the poverty guideline for your family size and state of residence.
After making qualifying payments for 20 to 25 years (depending on the plan), any remaining balance on your loans is eligible for forgiveness.
Eligibility for Income-Driven Repayment Plans
To be eligible for one of the income-driven repayment plans, you must have eligible federal student loans, such as Direct Loans or Federal Family Education Loans (FFEL). Private student loans do not qualify for these plans.
Additionally, each plan has specific eligibility requirements:
REPAYE: Available for all Direct Loan borrowers, regardless of when the loans were taken out or the borrower’s income.
PAYE: Available for Direct Loan borrowers who took out their first loan on or after October 1, 2007, and meet specific income requirements.
IBR: Available for borrowers with eligible federal student loans, including FFEL loans.
ICR: Available for borrowers with eligible federal student loans, including Parent PLUS loans.
It’s important to note that if you have FFEL loans, you may need to consolidate them into a Direct Consolidation Loan to become eligible for REPAYE or PAYE.
Comparing Income-Driven Repayment Plans
While all income-driven repayment plans share the common goal of making your student loan payments more affordable, there are some key differences to consider:
- Revised Pay As You Earn (REPAYE)
Payment: 10% of discretionary income
Loan Forgiveness: After 20 years (undergraduate loans) or 25 years (graduate loans)
Interest Subsidy: The government pays 100% of the interest on subsidized loans and 50% of the interest on unsubsidized loans during periods of partial financial hardship.
- Pay As You Earn (PAYE)
Payment: 10% of discretionary income
Loan Forgiveness: After 20 years
Interest Subsidy: The government pays 100% of the interest on subsidized loans during periods of partial financial hardship. No subsidy for unsubsidized loans.
- Income-Based Repayment (IBR)
Payment: 10% of discretionary income for new borrowers on or after July 1, 2014; 15% for borrowers who took out loans before that date.
Loan Forgiveness: After 20 years (new borrowers) or 25 years (existing borrowers)
Interest Subsidy: The government pays the interest on subsidized loans during the first three years of repayment.
- Income-Contingent Repayment (ICR)
Payment: The lesser of 20% of discretionary income or what you would pay on a 12-year fixed payment plan adjusted for income.
Loan Forgiveness: After 25 years
Interest Subsidy: None
Choosing the Right Income-Driven Repayment Plan
With so many options, choosing the right income-driven repayment plan can be a daunting task. Here are some factors to consider when making your decision:
- Your Income and Family Size
The amount you’ll pay each month under an IDR plan depends primarily on your income and family size. If you have a low income and a larger family, you’ll likely qualify for a lower payment.
- The Type of Loans You Have
If you have subsidized loans, plans like REPAYE and PAYE may be more advantageous, as they offer interest subsidies during periods of partial financial hardship.
- Your Long-Term Career Goals
If you’re pursuing a career path that is likely to lead to higher income in the future, a plan with a shorter forgiveness period, like REPAYE or PAYE, may be more beneficial.
- Your Loan Balance
If you have a large loan balance, a plan with a longer forgiveness period, like ICR, may be more suitable, as it could lead to more debt being forgiven in the long run.
Applying for an Income-Driven Repayment Plan
If you’ve determined that an income-driven repayment plan is the right choice for you, here’s how to apply:
- Log in to your StudentAid.gov account or create one if you haven’t already.
- Select the “Apply for an Income-Driven Repayment Plan” option.
- Follow the prompts to provide your income and family size information.
- Choose the IDR plan you want to apply for.
- Submit your application and any required documentation, such as tax returns or pay stubs.
Once your application is approved, your new payment amount will be calculated based on the plan you selected and your income information.
Recertifying Your Income Every Year
One important aspect of income-driven repayment plans is that you’ll need to recertify your income and family size every year. This ensures that your payment amount remains accurate and reflects any changes in your financial situation.
If your income increases, your payment may go up, but it will still be capped at a percentage of your discretionary income. If your income decreases, your payment could go down or even be reduced to $0 per month.
Failing to recertify your income can result in being placed on the standard 10-year repayment plan, which could significantly increase your monthly payments.
Potential Downside: Taxable Debt Forgiveness
While income-driven repayment plans offer significant relief for many borrowers, there is a potential downside to be aware of: taxable debt forgiveness.
When your remaining loan balance is forgiven after 20 or 25 years of qualifying payments, the forgiven amount is typically considered taxable income by the IRS. This means you could face a substantial tax bill in the year your loans are forgiven.
However, there are some exceptions to this rule. For example, if you work in certain public service jobs, you may be eligible for Public Service Loan Forgiveness (PSLF) after 10 years of qualifying payments. The forgiven debt under PSLF is not considered taxable income.
Additionally, the federal government has proposed changes to the taxation of forgiven student loan debt, which could impact the tax implications in the future.
Making the Most of Income-Driven Repayment Plans
Income-driven repayment plans can be a valuable tool for managing your student loan debt, but it’s important to understand the long-term implications and make an informed decision.
Here are some tips to help you make the most of these plans:
- Explore All Your Options
Before committing to an IDR plan, make sure to explore all your repayment options, including standard and extended repayment plans. Consider factors like your income, loan balance, and long-term career goals.
- Stay on Top of Recertification
Set reminders to recertify your income and family size every year. Failing to do so can result in significant payment increases.
- Plan for Potential Tax Implications
If you’re aiming for loan forgiveness under an IDR plan, start planning for the potential tax implications early on. Setting aside funds or exploring tax planning strategies can help mitigate the impact of a large tax bill.
- Consider Public Service Loan Forgiveness
If you work in a qualifying public service job, explore the Public Service Loan Forgiveness (PSLF) program, which offers tax-free loan forgiveness after 10 years of qualifying payments.
- Stay Informed
Student loan regulations and policies are subject to change, so it’s important to stay informed about any updates or modifications to income-driven repayment plans.
By understanding the intricacies of income-driven repayment plans and making an informed decision, you can take control of your student loan debt and find a path to financial freedom.