Student debt is at an all-time high, and with an average loan balance of $29,650, it’s quite understandable that many graduates are seeking payment relief. When many people begin their careers, they are faced with skimpy starting salaries, which can really stretch a budget thin (if this is affecting you, don’t miss our guide to budgeting for college graduates).
The good news is that federal student loan borrowers have several options to potentially lower their student loan payments: income-driven repayment plans.
There are four plans to choose from, and while they are similar, key differences can make certain income-driven plans more advantageous than others, depending on your situation.
In this guide, we’ll not only go over the basics and provide details for each income-driven repayment plan—we’ll also provide some tips to help you determine which is the right repayment plan for your situation.
Income-driven repayment plan basics
The basic idea behind income-driven repayment plans is that, once you enroll, your monthly payment will be calculated based on a percentage of your —discretionary income.” Your discretionary income is defined by the government as the difference between these two numbers:
- Your adjusted gross income (from your tax returns)
- 150% (1.5 times) the poverty guideline for your family size and state
On some repayment plans, this payment has a cap, but on others it doesn’t.
After 20 or 25 years of income-driven payments (depending on the plan and your situation), the remaining balance will be forgiven.
The price you pay for choosing income-driven repayment
Generally, if you enroll in an income-driven repayment plan, you will pay more over the course of your repayment than you would have paid on the standard 10-year repayment plan.
Yes, your payment is lower, but you are making payments for at least twice as long as you would have on the standard plan. Furthermore, if your income increases over time, your payment will increase as well.
Additionally, the balance that is forgiven when you complete your repayment may be subject to taxation as income. If you have a high loan balance and make low payments over the course of 20-25 years, you do face the possibility of a hefty one-time tax bill.
That said, for many borrowers who are struggling with their payments, this trade-off can be worth it.
It’s also worth mentioning that the above considerations are generally not a concern for borrowers who are pursuing Public Service Loan Forgiveness (PSLF), which forgives your loans (tax-free) after just 10 years of reduced payments on an income-driven repayment plan.
Income-driven repayment plan – at-a-glance comparison
|Plan||Income-Based Repayment (IBR)||Pay As You Earn (PAYE)||Revised Pay As You Earn (REPAYE)||Income-Contingent Repayment (ICR)|
|Who it’s best for||Loans older than 2007||Better than REPAYE for married borrowers||Better than PAYE for some single borrowers. Has some advantages for unsubsidized loans.||Parents|
|Time for loans to be forgiven||20 or 25 years (depends on when you borrowed)||20 years||Undergrad: 20 years Grad/professional: 25 years||25 years|
|Monthly payment calculation||10% of discretionary income (15% for older loans)||10% of discretionary income||10% of discretionary income||It’s complicated. (see details on ICR below)|
|How to qualify||High student debt compared to your income||High student debt compared to your income||None||Parents must consolidate loans first|
|Forgiven amount subject to taxation?||Yes||Yes||Yes||Yes|
Income-driven repayment plans – detailed comparison
There are four income-driven repayment plans, each with its own criteria, rules, and advantages. Here, we’ll go over the highlights of each plan, with an eye to which plan might work best for a given situation.
Income-Based Repayment (IBR)
If you expect to stay in a low-paying field and have a relatively high student loan balance, Income-Based Repayment may be a good option for you. Generally speaking, if your total student loan debt is greater than your annual income, and you don’t expect any drastic increases in income, then IBR may be worth pursuing (after considering the other income-driven plans).
If your balance is lower than your income or you expect to increase your salary as you gain more experience, it may be a better idea to stick with the standard repayment plan, if you can manage it. This will generally save you more money in the long run, for reasons mentioned earlier.
IBR will cap your payments at 10% of your discretionary income (15% if you borrowed prior to July 1, 2014), and will be recalculated every year when you certify your income. Your payment is capped at what you would have paid on the 10-year standard repayment plan.
Married individuals can have their spouse’s income excluded from the payment calculation, if they file taxes separately.
Your repayment will take 20 or 25 years (based on when you borrowed), at which point they will be forgiven — and potentially taxed.
Income-Based Repayment does have income and debt criteria that you need to satisfy to enroll – you will need to have a low income relative to your debt to qualify.
Pay As You Earn (PAYE) Plan
Pay As You Earn (PAYE) is fairly similar to Income-Based Repayment. There are a few key differences, though, and most borrowers who qualify may find PAYE to be more advantageous.
One big difference is in the unpaid interest that builds up on your loan. Under PAYE, the government will pay all this interest on subsidized loans in the first three years. This makes PAYE much more attractive for borrowers with subsidized loans, especially if they only need to go on the plan for a short time while they begin their career.
PAYE also doesn’t have different rules for people who took loans out at different times – everyone gets the same payment cap at 10% of their income, and forgiveness after 20 years. That said, you must have borrowed after 2007 to qualify for PAYE.
As with IBR, borrowers enrolled in PAYE can have their spouse’s income excluded from the payment calculation if they file taxes separately.
At the end of the day, the comparison between PAYE and IBR tilts in PAYE’s favor. If you qualify, PAYE is likely your best bet.
Revised Pay As You Earn (REPAYE)
Of the income-driven repayment plans, Revised Pay As You Earn (REPAYE) is best contrasted with PAYE. One big difference is that, if you took out loans for graduate or professional school, your loans won’t be forgiven until after 25 years, rather than the 20 years you would have to wait under PAYE. This doesn’t affect people who took out loans for undergrad degrees — those are still forgiven after 20 years.
Now we’ll get into the main disadvantages of REPAYE. While there is no requirement to have a high debt load relative to your income, your payments aren’t capped like they are on IBR and PAYE.
If your income goes up, you could wind up paying more than you would have on the standard 10-year plan. This effectively prices you out of the program.
Married couples also can’t exclude spousal income from consideration in the payment calculation – your spouse’s income will be used whether you file jointly or separately. And even if you aren’t married now, a lot can happen in 20 or 25 years of repayment.
All that said, REPAYE can still be a viable solution, especially if you are unmarried and especially if you only want to go on an income-driven payment plan for a short period of time and have unsubsidized loans.
Here’s why: the big bonus for REPAYE borrowers is that, in addition to paying all the interest that builds up on your subsidized loans in the first three years (as with PAYE), the government will also pay half of the interest that accrues on those same subsidized loans after three years, as well as on unsubsidized loans during all periods (including the first three years).
Income-Contingent Repayment (ICR)
Income-Contingent Repayment is only really a viable income-driven repayment plan for one group of people: parents who took out Parent PLUS loans for their children’s education. ICR is the only income-driven plan that allows Parent PLUS loans, provided they are consolidated first.
ICR determines your payment by using whichever is lower – 20% of your discretionary income, or the amount that you would pay on a fixed 12-year repayment plan. Your spouse’s income can be excluded by filing taxes separately.
As with the other income-driven repayment plans, after 25 years, your loans become eligible for forgiveness.
How to apply for income-driven repayment
To enroll on an income-driven repayment plan, you will need to use the U.S. Department of Education’s online application. You will also use this same website when you recertify your income each year. To apply, you will need to provide the following information:
- Personal Information
- Family size
- Marital status
- Access to our tax information via the IRS Data Retrieval Tool
Once you fill out the required information, you’ll be able to use a tool to see the amount you would pay under each of the income-driven repayment plans, based on a 5% expected annual increase in income.
Keep in mind when you compare that the —amount forgiven” is subject to tax, so you will need to plan ahead for that lump sum payment.
You can then select which plan (or plans) you are interested in and finalize your application.