Income-Driven Repayment Plans: Pros and Cons for Borrowers

If you’re a federal student loan borrower struggling to pay bills, opting for one of the government’s several income-based repayment plans could bring some welcome relief. An income-driven repayment plan, also known as an IDR plan, offers borrowers a lower monthly payment based on their factors, including income, family size, and loan type. 

The monthly payment on income-driven repayment plans is typically lower than the standard repayment plan and may be as low as $0 for borrowers with low or no income. While income-driven repayment plans have many benefits, it’s essential to consider the requirements you’ll have to meet and the potential drawbacks, such as monthly payments that rise over time if your income increases.

What Is Income-Driven Repayment?

Income-driven repayment plans base the monthly loan payment on the borrower’s income, not the debt owed. This can make the loan payments more affordable if your total student loan debt exceeds your annual income.

The four types of income-driven repayment plans are:

• Income-Contingent Repayment (ICR)
• Income-Based Repayment (IBR)
• Pay-As-You-Earn Repayment (PAYE)
• Saving on a Valuable Education (SAVE) — formerly Revised Pay-As-You-Earn Repayment (REPAYE)

These repayment plans differ in several details or requirements, including the percentage of discretionary income, the definition of discretionary income, and the repayment term. The chart below illustrates some important differences in the various income-driven repayment plans.

See also: What are the Differences Between ICR, IBR, PAYE Student Loan Repayment

Income-Driven Repayment Plans Breakdown

Each income-based repayment plan calculates your monthly payment amount differently and has its own eligibility requirements. The table below breaks down each option, including how your monthly payment is calculated and the eligibility requirements.

Your monthly payments are calculated each year based on the factors mentioned above. Every year, when you recertify, your monthly payments will be recalculated based on your updated income, family size, total loan balance, and state of residence if it changes. If you don’t update your income and family size by the annual deadline, you may pay more than you need to.

Pros of Income-Driven Repayment Plans

There are many benefits of an income-driven repayment plan that you’ll want to consider before making your decision. These range from saving money to providing much more flexibility to help you deal with the unexpected, such as losing your job.

The top pros of income-driven repayment plans are:

Lower Monthly Payments

Income-driven repayment plans provide borrowers with more affordable student loan payments. The student loan payments are based on your discretionary income. These repayment plans usually provide borrowers with the lowest monthly loan payment among all repayment plans available to the borrower. 

Generally, borrowers will qualify for a lower monthly loan payment under income-driven repayment if their total student loan debt at graduation exceeds their annual income.

Payments Could be $0

Low-income borrowers may qualify for a student loan payment of zero. The monthly loan payment under an income-driven repayment plan is zero if the borrower’s adjusted gross income is less than 225% of the federal poverty level (SAVE), 150% of the poverty level (IBR and PAYE), or 100% of the poverty level (ICR). If your monthly payment is zero, that payment of zero still counts toward loan forgiveness. 

Borrowers who earn the federal minimum wage, currently $7.25 per hour, and work 40 hours per week earn less than 150% of the poverty line for a family of one. Borrowers who earn $15 per hour earn less than 150% of the poverty line for a family of three. 

See also: My IDR Payment is $0. Now What?

Loan Forgiveness

Under the American Rescue Plan Act of 2021, loan forgiveness after 20 or 25 years of payments in an income-driven repayment plan is tax-free through 2025.

Another program, Public Service Loan Forgiveness (PSLF), cuts the number of payments to 120 (10 years). The loan forgiveness under PSLF is permanently tax-free.

Other minor differences exist among the income-driven repayment plans, such as whether the federal government pays accrued but unpaid interest during the first three years, how accrued but unpaid interest is capitalized, and the minimum required payments when the calculated payment is less than $10.

Helps the Unemployed

Income-driven repayment plans are good for borrowers who are unemployed and who have already exhausted their eligibility for an unemployment deferment, economic hardship deferment, and forbearance. These repayment plans may be a good option for borrowers after the payment pause and interest waiver expires. Since the payment is based on your income, your payment could be $0.

Interest Could be Paid

The federal government pays all or part of the accrued but unpaid interest on some loans in some income-driven repayment plans. 

• During the first three years, the federal government pays 100% of the accrued but unpaid interest on subsidized loans in IBR and PAYE. There is no interest payment benefit for unsubsidized loans on IBR and PAYE plans.
• For SAVE, the federal government pays 100% of the unpaid interest on all federal student loans when the interest exceeds the loan payment for the remainder of the repayment term.
• ICR does not have an interest payment benefit.

Credit Scores Are Not Impacted

Income-driven repayment plans will not hurt borrowers’ credit scores. Borrowers who make the required monthly loan payment will be reported as current on their debts to credit bureaus, even if the required payment is zero. 

Cons of Income-Driven Repayment Plans

Although income-driven repayment plans help borrowers experiencing financial difficulty, several disadvantages must be considered before agreeing to this type of repayment.

Eligibility Is Limited

Eligibility for income-driven repayment is mainly limited to federal student loan borrowers. 

Federal Parent PLUS loans are not directly eligible for income-driven repayment, but they may become eligible for ICR by being included in a Federal Direct Consolidation Loan.

Most private student loans do not offer income-driven repayment plans. Although IBR and SAVE are available for FFELP and Direct Loans, PAYE is available only for Direct Loans. 

See also: Are Parent Loans Eligible for Income-Driven Repayment?

Your Total Balance Can Increase

Student loans can be negatively amortized under income-driven repayment plans. Negative amortization occurs when loan payments are less than the new interest accrued that month, increasing the loan balance.

This will not matter much if the borrower eventually qualifies for loan forgiveness. However, borrowers may still feel uneasy seeing their loan balance increase since they will be making no progress in paying down their debt.

You’ll Pay Taxes on Forgiven Debt

Unlike forgiveness with Public Service Loan Forgiveness, loan forgiveness after 20 or 25 years in an income-driven repayment plan is taxable under current law. The IRS treats the cancellation of debt as income to the borrower.

In effect, the taxable student loan forgiveness substitutes a smaller tax debt for the student loan debt. There are several options for dealing with the tax debt.

• If the borrower is insolvent, with total debt exceeding total assets, the borrower can ask the IRS to forgive the tax debt by filing IRS Form 982. 
• The taxpayer might propose an offer in compromise by filing IRS Form 656.   
• Besides paying off the tax bill in full, the final option is to seek a payment plan of up to six years by filing IRS Form 9465 or using the Online Payment Agreement Tool. The IRS charges interest on the payment plans. The borrower may be required to sign up for auto-debit if the tax debt is $25,000 or more. 

See also: Common Mistakes Involving Income-Driven Repayment Plans

Married Borrows Could See Their Payments Increase

Some income-driven repayment plans have a marriage penalty. The monthly loan payment may increase if the borrower gets married and their spouse has a job.

If you file a joint return, your loan payment is based on your combined and spouse’s combined income.

With all repayment plans, the loan payment is based on just the borrower’s income if the borrower files federal income tax returns as married filing separately.

However, filing a separate tax return causes the borrower to miss out on certain federal income tax deductions and tax credits, such as the Student Loan Interest Deduction, American Opportunity Tax Credit (AOTC), the Lifetime Learning Tax Credit (LLTC), the Tuition and Fees Deduction, the Education Bond Program and various child and adoption tax credits.

See also: Whose Income Counts for Income-Driven Repayment Plans?

You Have to Re-Certify Annually

There is an annual paperwork requirement. Borrowers must recertify their income and family size every year. If you miss the deadline, your loans will be placed in the standard repayment plan. If you file the recertification late, the accrued but unpaid interest will be capitalized, adding to the loan balance. 

See also: How Do I Recertify for Income-Driven Repayment for Student Loans?

You’ll Carry Debt for a Long Time Before Forgiveness

The repayment term of 20 or 25 years is more than half of the average work-life for college graduates. Some borrowers have compared the repayment plans with indentured servitude, saying they feel like they are in debt forever. Indeed, borrowers who choose an income-driven repayment plan will be in debt longer than the standard repayment plan and may pay more interest due to the longer repayment term. 

Borrowers with a 20- or 25-year repayment term will still repay their student loans when their children enroll in college. However, they are less likely to have saved for their children’s college education and will be less willing to borrow to help them pay for school.

Is an Income-Driven Repayment Plan Right for You?

Income-based repayment student loans can be great options for anyone who feels their current loan repayments are too high compared to their income. These plans will give you a more affordable monthly repayment in line with your income, making payments more manageable and helping you repay your loan faster.

Four common situations when income-based loans can be the right choice:

1. You’re unemployed or have a low income
2. You have high student loan debt
3. You’re struggling to make your loan payments and at risk of late payment or default.
4. You’ll qualify for Public Service Loan Forgiveness

The most suitable income-driven repayment plan for you will depend on the type of loans you have and your situation. When deciding what repayment plan is right for you, use our repayment calculators.

We have a repayment calculator for each income-driven plan, which can be found below.

• Income-Based Repayment Calculator
• Income-Contingent Repayment Calculator
• Pay As You Earn Repayment Calculator

Other Ways to Get Help Repaying Your Student Loans

Student loan income-based repayment can be a great solution if you’re struggling to pay your student loans, but they’re not the only option. Here are some other ways you can get help repaying your student loans:

• The federal government offers extended repayment and graduated repayment plans.
• Refinancing your loans through a private lender.
• Additional student loan repayment assistance programs.

You can also check out our free guide to student loan repayment plans to learn more.

Frequently Asked Questions (FAQs) for Income-Driven Repayment Plans

We’ve answered the most common questions about income-driven repayment plans below to help you understand your options.

Are income-driven repayment plans a good idea?

Yes, they can be a great option if you have low income, high student debt, or are struggling to make payments. They lower your monthly payments based on your income and may qualify you for loan forgiveness after 20–25 years.

Is there an income limit for income-driven repayment plans?

There’s no strict income limit, but your payment amount is based on your income and family size. If your income is low compared to your loan balance, you’ll likely benefit the most.

How long do IDR plans last?

These plans last until you either pay off your loan or qualify for loan forgiveness. Forgiveness typically happens after 20–25 years of qualifying payments.

Are income-driven repayment plans forgiven after 20 years?

Yes, forgiveness happens after 20 years for borrowers with undergraduate loans only, and 25 years for graduate loans or other types of loans.

Will income-driven repayment hurt my credit score?

No, your credit score won’t be affected if you make your payments on time. In fact, IDR plans can help you avoid default, which would harm your credit.

See also:

• Should You Prepay a Student Loan on Income-Driven Repayment?
• How Do I Apply for Income-Driven Repayment Plans?
• Reduced Income or Lost Your Job? Do This with Student Loans