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The Pros and Cons of Income-Driven Repayment Plans

Kat Tretina
refinance federal student loans
refinance federal student loans

Before You Read, Lower Your Student Loan Payment

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Before You Read, Lower Your Student Payment

It’s that quick & easy — really. Our free tool checks a network of top refinance lenders and shows you options in one easy chart.

Checking rates takes 2 minutes with no impact on your credit
Federal & private loans are eligible
No maximum loan amount

“There’s no way I can afford these student loan payments.”

Sound familiar? You’re not the only one. According to the U.S. Department of Education, the national federal student loan cohort default rate — a measure of how many people haven’t made payments for at least 270 days — is over 10%.

If you’re struggling to afford your federal student loan payments, one way to get help is to apply for an income-driven repayment (IDR) plan. But while they can give you some financial relief, there are some serious drawbacks to IDR plans, too.

Here’s what you need to know — plus an alternative student loan repayment solution that may be a better fit for your needs.

How income-driven repayment plans work

With IDR plans, your loan servicer caps your monthly payment at a percentage of your discretionary income. The percentage that you’ll pay and your repayment term varies by plan.

There are four different IDR plans:

  • Income-Based Repayment: 10% of your discretionary income with a 20-year term, but your payment will never be higher than your monthly payment under a 10-year Standard Repayment Plan.
  • Income-Contingent Repayment: Either 20% of your discretionary income with a 25-year term or what you’ll pay with a fixed repayment term over 12 years, whichever is less.
  • Pay As You Earn: 10% of your discretionary income with a 20-year term, but your payment will never be higher than your monthly payment under a 10-year Standard Repayment Plan.
  • Revised Pay As You Earn: 10% of your discretionary income with a 20-year term for undergraduate loans, 25-year term if any of your loans were for graduate school.

Pros of income-driven repayment plans

If you can’t afford your payments, it’s important to understand the benefits of IDR plans:

1. You can reduce your monthly payment

If you apply for an IDR plan, the loan servicer bases your monthly payment on your discretionary income and family size. Depending on your circumstances, you could qualify for a dramatically lower payment. Some low-income borrowers even qualify for $0 payments, meaning they don’t have to make payments each month.

2. You can have a portion of your loan balance discharged

After making payments for 20 to 25 years — depending on which IDR plan you’re on — your loan servicer will forgive your remaining loan balance if you have any debt left over. If you have a substantial amount of debt and a low income — and therefore qualify for low monthly payments — you could be eligible for significant loan forgiveness.

3. Payments made under an IDR plan count toward Public Service Loan Forgiveness

If you work for a non-profit organization or government agency, it’s a good idea to enroll in an IDR plan. As a non-profit or government employee, you can qualify for Public Service Loan Forgiveness (PSLF). After working for an eligible employer for ten years and making 120 qualifying monthly payments, the government will forgive your student loans — tax-free.

Payments you make under an IDR plan count as qualifying payments. Even if you’re eligible for a $0 payment, you’ll get credit toward the 120 necessary payments for PSLF.

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Cons of income-driven repayment plans

While IDR plans can be useful for some borrowers, they’re not for everyone. Here are some drawbacks of IDR plans to keep in mind before applying.

1. Not all borrowers are eligible for IDR plans

Only some student loan borrowers are eligible for IDR plans. To qualify for an IDR plan, you must have federal Direct student loans. If you have other types of federal loans, you can only qualify for an IDR plan if you first consolidate them with a Direct Consolidation Loan.

Private student loan borrowers are not eligible for IDR plans.

2. You’ll pay more in interest over time

Depending on which repayment plan you qualify for, your repayment term could be 20 or 25 years in length. With a longer repayment term than a 10-year Standard Repayment Plan, you could end up paying far more in interest charges.

For example, if you had $35,000 in student loans at 4.53% interest, your monthly payment under a 10-year repayment plan would be $363 per month. By the end of your repayment term, you’d pay a total of $43,589.

If you had an income of $30,000 per year and applied for an income-contingent repayment plan, your monthly payment would start at just $223 per month. However, your repayment term would last for 25 years, and you’d repay a total of $53,617 because of the longer loan term.

3. You have to recertify every year

Each year, you have to recertify your income and family size, meaning you have to submit another IDR plan application. Even if there’s no change to your situation, you still have to send in your information.

If you miss the recertification deadline, the loan servicer will lower your family size — increasing your monthly payment. Depending on what plan you’re on, unpaid interest can be capitalized, adding to the total cost of your loan.

4. Your payment can go up, or you could lose eligibility

Because your monthly payments are determined by your income and family size, they can fluctuate along with any changes in your life. If you receive a big bonus at work or a promotion, your monthly loan payments could increase, or you could lose your eligibility for the IDR plan altogether.

5. You could face a hefty tax bill

After 20 to 25 years of making payments, you can qualify to have your remaining loan balance discharged. However, there are some strings attached to that benefit. The IRS requires student loan borrowers to pay income taxes on any amount that is forgiven at the end of your repayment period, which could cost you thousands of dollars at tax time.

Student loan refinancing: An alternative to IDR plans

While applying for an IDR plan can reduce your monthly payments, you could end up paying thousands more in interest charges. And, you may end up being in debt for decades.

If you want to save debt and pay off your debt sooner — or if you have private loans and are ineligible for an IDR plan — another repayment strategy is student loan refinancing.

With this method, you apply for a loan from a private lender for the amount of your existing debt. You can qualify for a refinancing loan if you have federal or private loans or even a mix of both.

If you have good credit — or have a friend or relative with good credit who can act as a cosigner — you can qualify for a loan with a lower interest rate than you have now, helping you save money over time. With a lower rate and by extending your repayment term, you can even reduce your monthly payment, making it more affordable.

If you think that refinancing sounds like a better option for you than an IDR plan, shop around with different lenders first before applying to maximize your savings. You can use Purefy’s Compare Rates tool to get rate estimates from top refinancing lenders — all in one place with one fast form, and no impact to your credit whatsoever.

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Ascent Rate Disclosure

Ascent’s undergraduate and graduate student loans are funded by Bank of Lake Mills or DR Bank, Member FDIC. Loan products may not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions may apply. For Ascent Terms and Conditions please visit: www.AscentStudentLoans.com/Ts&Cs.

Rates are effective as of 12/1/2023 and reflect an automatic payment discount of either 0.25% (for credit-based loans) OR 1.00% (for undergraduate outcomes-based loans). Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized back account each month. For Ascent rates and repayment examples please visit: www.AscentStudentLoans.com/Rates.

1% Cash Back Graduation Reward subject to terms and conditions. Click here for details.

SoFi Rate Disclosure

3 SoFi Rate Disclosure:

Fixed rates range from 4.49% APR to 8.99% APR with a 0.25% autopay discount. Variable rates from 5.09% APR to 8.99% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.

ISL Rate Disclosure

Earnest Rate Disclosure

2 Earnest Rate Disclosure:


Actual rate and available repayment terms will vary based on your income. Fixed rates range from 5.44% APR to 9.99% APR (excludes 0.25% Auto Pay discount). Variable rates range from 5.97% APR to 9.99% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. The maximum rate for your loan is 8.95% if your loan term is 10 years or less. For loan terms of more than 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95%. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account.

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THIS IS AN ADVERTISEMENT. YOU ARE NOT REQUIRED TO MAKE ANY PAYMENT OR TAKE ANY OTHER ACTION IN RESPONSE TO THIS OFFER.

Earnest Rate Disclosure

Rates displayed include the 0.25% Auto Pay discount. You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment from a checking or savings account. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

Actual rate and available repayment terms will vary based on your income. Fixed rates range from 4.67% APR to 16.15% APR (excludes 0.25% Auto Pay discount). Variable rates range from 5.64% APR to 16.45% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan origination loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. Although the rate will vary after you are approved, it will never exceed 36% (the maximum allowable for this loan). Please note, Earnest Private Student Loans are not available in Nevada. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

Nine-month grace period is not available for borrowers who choose our Principal and Interest Repayment plan while in school.

Earnest clients may skip one payment every 12 months. Your first request to skip a payment can be made once you’ve made at least 6 months of consecutive on-time payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Please be aware that a skipped payment does count toward the forbearance limits. Please note that skipping a payment is not guaranteed and is at Earnest’s discretion. Your monthly payment and total loan cost may increase as a result of postponing your payment and extending your term.

Loan Eligibility criteria: Eligible students must: 1) For college Freshmen, Sophomores and Juniors, attend, or be enrolled to attend, a Title IV school full-time. For college Seniors and Graduate students, attend, or be enrolled to attend, a Title IV school at least half-time; and 2) be pursuing a Bachelor’s or Graduate degree. Earnest private student loans are subject to credit qualification, completion of a loan application, verification of application information, self-certification of loan amount, and school certification.

Responsible borrowing tip: Explore all scholarship, grant and federal options before applying for a private loan.

Earnest Private Student Loans are made by One American Bank, Member FDIC. One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104.

Earnest loans are serviced by Earnest Operations LLC, 535 Mission St., Suite 1663 San Francisco, CA 94105, NMLS #1204917, with support From Navient Solutions, LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by agencies of the United States of America.

Advertiser Disclosure:

THIS IS AN ADVERTISEMENT. YOU ARE NOT REQUIRED TO MAKE ANY PAYMENT OR TAKE ANY OTHER ACTION IN RESPONSE TO THIS OFFER.

ELFI Rate Disclosure

4 ELFI Rate Disclosure:

Education Loan Finance is a nationwide student loan debt consolidation and refinance program offered by Tennessee based SouthEast Bank. ELFI is designed to assist borrowers through consolidating and refinancing loans into one single loan that effectively lowers your cost of education debt and/or makes repayment very simple. Subject to credit approval. See Terms & Conditions. Interest rates current as of 10/13/2023. The interest rate and monthly payment for a variable rate loan may increase after closing, but will never exceed 9.95% APR. Interest rates may be different from the rates shown above and will be based on the term of your loan, your financial history, and other factors, including your cosigner’s (if any) financial history. For example, a 10-year loan with a fixed rate of 6% would have 120 payments of $11.00 per $1,000 borrowed. Rates are subject to change.

ELFI Rate Disclosure

Education Loan Finance is a nationwide student loan provider offered by Tennessee based SouthEast Bank. ELFI is designed to assist students financially with receiving their education. Subject to credit approval. See Terms & Conditions. Interest rates current as of 12/11/2023. Variable interest rates may increase after closing but will never exceed 18.00%. Interest rates may also differ from the rates shown above. The term of your loan, financial history, and other factors, including your cosigner’s (if any) financial history can affect the interest rate. For example, a 10-year loan with a fixed rate of 7% would have 120 payments of $11.61 per $1,000 borrowed. Rates are subject to change.

College Ave Rate Disclosure

College Ave Student Loans products are made available through Firstrust Bank, member FDIC, First Citizens Community Bank, member FDIC, or M.Y. Safra Bank, FSB, member FDIC.. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. If a payment is returned, you will lose this benefit. Variable rates may increase after consummation.
Minimum loan amount $1,000, as certified by your school and less any other financial aid you might receive.
This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
Information advertised valid as of 1/1/2024. Variable interest rates may increase after consummation. Approved interest rate will depend on the creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of full principal and interest payments with the shortest available loan term.

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