Income-Driven Repayment Plans: Pros, Cons, & How to Apply

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Mark Kantrowitz

By Mark Kantrowitz

September 20, 2022

Income-driven repayment plans provide payment options for many federal student loan borrowers that lowers their monthly payment amount. As the name suggests, if you enroll in an Income-Driven Repayment plan, your monthly payment is based on your income and family size and not entirely on how much you owe.

The monthly payment on income-driven repayment plans will be lower than the standard repayment plan. The payment may even be zero for borrowers with low or no income. While there are many benefits of income-driven repayment plans, some drawbacks may prevent you from moving forward.

The lower loan payments may make income-driven repayment plans a good option for borrowers who are struggling to repay their student loans, especially after the end of the COVID-19 payment pause. However, even though the remaining debt is forgiven after 20 or 25 years of repayment, the loan forgiveness may be taxable. 

What Is Income-Driven Repayment?

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

The four income-driven repayment plans are:

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.

Repayment Plan Percent of Discretionary Income Definition of Discretionary Income Repayment Term
(Undergraduate)
Repayment Term
(Graduate)
ICR 20%   AGI – 100% PL 300 payments
(25 years)
300 payments
(25 years)
IBR 15% AGI – 150% PL 300 payments
(25 years)
300 payments
(25 years)
PAYE 10% AGI – 150% PL 240 payments
(20 years)
240 payments
(20 years)
REPAYE 10% AGI – 150% PL 240 payments
(20 years)
300 payments
(25 years)

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

Loan Forgiveness With Income-Driven Repayment

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.

There are other minor differences 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.

Income-Driven Repayment Plans Breakdown

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

Repayment Plan Monthly Payment Calculation Eligibility Requirements
ICR

Based on adjusted income, family size, and total Direct Loan balance, not including parent PLUS loans.

For Direct Loans only, parent PLUS Loans and consolidation loans including one or more parent PLUS Loans that entered repayment before 2006 are ineligible. 

IBR

Based on adjusted gross income, family size, and total student loan debt, generally 10 or 15% of discretionary income, based on the disbursement dates of your loans.

For FFELP and Direct Loans, parent PLUS Loans and consolidation loans including one or more parent PLUS Loans are ineligible. You’ll also need to be assessed as having “partial financial hardship” through the Income-Driven Payment Plan Request.

PAYE

Based on adjusted gross income, family size, and total federal student loan balance, generally 10% of discretionary income.

Only for Direct Loans. You’ll also need to be assessed as having “partial financial hardship” through the Income-Driven Payment Plan Request, have at least one eligible Direct Loan first disbursed on or after October 1, 2011, and have been a new borrower on or after October 1, 2007.

REPAYE

Based on adjusted gross income, family size, and total eligible federal student loan balance, generally 10% of discretionary income.

Only for certain Direct Loans. Ineligible loans include FFELP Loans, Federal Direct Parent PLUS Loans, and Federal Direct Consolidation Loans with one or more Federal Direct Parent PLUS Loans.

Although each type of IBR student loan plan has its own rules for calculating monthly payments, there are a few ways to reduce your loan payments on an income-based repayment plan. To check whether you are eligible for a pay-as-you-earn student loan or other types of income-based loan repayment plans, you can visit the US Government Student Aid site.

Additionally, failing to recertify your income-based repayment plan could result in your payments being increased, and unpaid interest could be capitalized or added to the loan principal. If you fail to recertify your REPAYE plan, you’ll be removed from the plan and placed on an alternative plan, where your monthly payments won’t be based on your income. For all other IBR plans, failing to recertify will mean that while you’ll stay on the plan, your monthly payment will no longer be income-based.

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 end up paying more than you need to.

How to Apply for an Income-Driven Repayment Plan

To apply for a student loan income-based repayment plan, you’ll need to submit the Income-Driven Repayment Plan Request by following these seven steps:

  1. Visit StudentAid.gov and sign in. If you don’t already have an account, create one with your Social Security Number and phone number or email.
  2. Select the type of plan you want to apply for by choosing IBR/ICR/PAYE/REPAYE Request.
  3. Enter your personal and spousal information.
  4. End your income information: the easiest way to do this is to authorize the portal to temporarily transfer you to the IRS.gov website. You can then use the IRS Data Retrieval Tool to transfer your up-to-date IRS data.
  5. Enter your family size
  6. Select your chosen repayment plan
  7. Submit

Every year, you’ll need to recertify by following the same process. By providing your updated income and personal information, the Federal Government will assess whether you still qualify for this kind of plan, and provide you with the lowest possible monthly payment amount according to your situation.

Advantages of Income-Driven Repayment Plans

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

The best pros of income-driven repayment plans are:

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 forbearances. 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 even be $0.

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 150% of the poverty line (IBR, PAYE and REPAYE) or 100% of the poverty line (ICR). If your monthly payment is zero, that payment of zero still counts toward loan forgiveness. 

Borrowers who earn the federal minimum wage, which is 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?

The Remaining Balance Is Forgiven

After 20 or 25 years of repayment, the remaining student loan balance is forgiven. The repayment term depends on the type of income-driven repayment. The repayment term is 25 years for ICR and IBR, and for borrowers who have graduate school loans under REPAYE. The repayment term is 20 years for PAYE and for borrowers who have only undergraduate loans under REPAYE. However, this balance is taxed unless you qualify for public service loan forgiveness.

The income-driven repayment plans provide tax-free student loan forgiveness after 10 years for borrowers who qualify for public service loan forgiveness (PSLF). To qualify, the loans must be in the Direct Loan program while being repaid in an income-driven repayment plan and the borrower must work full-time in a qualifying public service job or a combination of qualifying public service jobs. PSLF eliminates debt as a disincentive to pursuing a public service career.

The economic hardship deferment counts toward the 20 or 25-year forgiveness in income-driven repayment plans, but not toward public service loan forgiveness.

Interest Could be Paid

The federal government pays all or part of the accrued but unpaid interest on some loans in some of the 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, PAYE, and REPAYE and 50% of the accrued but unpaid interest on unsubsidized loans in REPAYE. 
  • For the remainder of the repayment term, the federal government pays 50% of the interest on all federal student loans in REPAYE. All other interest remains the responsibility of the borrower and may be capitalized if it remains unpaid, depending on the repayment plan. 

Credit Scores Are Not Impacted

Income-driven repayment plans will not hurt the borrower’s 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. 

Disadvantages of Income-Driven Repayment Plans

Although income-driven repayment plans help borrowers who experience financial difficulty, these repayment plans come with several disadvantages that need to be considered before agreeing to this type of repayment.

Eligibility Is Limited

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

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

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

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

Your Total Balance Can Increase

It is possible for student loans to be negatively amortized under income-driven repayment plans. Negative amortization occurs when the loan payments you are making are less than the new interest that accrues that month. This causes the loan balance to increase.

This won’t matter much if the borrower eventually qualifies for loan forgiveness. But, still, borrowers may 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, the 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.   
  • The final option, other than paying off the tax bill in full, 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

Confusion Is Common

There are too many income-driven repayment plans, making it harder for borrowers to choose which plan is best for them.

There are many details that differ among income-driven repayment plans. PAYE provides the lowest monthly payment, but eligibility is limited to borrowers with loans disbursed since October 1, 2011.

For other borrowers, either IBR or REPAYE will offer the lowest cost, but which is best depends on borrower specifics, such as whether the borrower is married or will eventually get married, whether the borrower’s income will increase, and whether the borrower has any federal loans from graduate school.

Married Borrows Could See Their Payments Increase

Some of the income-driven repayment plans suffer from a marriage penalty. If the borrower gets married and their spouse has a job, the monthly loan payment may increase.

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

With ICR, IBR and PAYE, 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.

With REPAYE, the loan payment is based on joint income regardless of the tax filing status. 

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

No Standard Repayment Cap

Loan payments will increase as income increases under certain income-driven repayment plans. There is no standard repayment cap on the loan payments in the ICR and REPAYE repayment plans, so loan payments can increase without bound as income increases.

See also: How to Reduce Loan Payments in an Income-Driven Repayment Plan

You Have to Re-Qualify 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 it 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 that it feels like they are in debt forever. Certainly, borrowers who choose an income-driven repayment plan will be in debt longer than in the standard repayment plan and may pay more interest due to the longer repayment term. 

Borrowers in a 20 or 25-year repayment term will still be repaying their own student loans when their children enroll in college. 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.

Once you choose an income-driven repayment plan, you are locked into that repayment plan. A repayment plan lock happens because the loan payments will jump if you switch from an income-driven repayment plan to another repayment plan. The loan payments will be based on the loan balance when you change repayment plans, not the original loan balance. This can make the new monthly loan payments unaffordable. 

Is an Income-Driven Repayment Plan Right for You?

Generally speaking, 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 to pay off 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 on your loan
  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, as well as your individual situation. As you are deciding what repayment plan is right for you, use our repayment calculators.

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

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:

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 compiled a list of the most frequently asked questions regarding income-driven repayment plans and answered each below.

Are income-driven repayment plans a good idea?

Income-driven repayment plans have their pros and cons, and they’re not the best solution for everyone. However, if you’re on a low income, have high student debt, or otherwise struggling to make your student loan payments, they may be right for you. Additionally, income-driven repayment plan forgiveness options mean that you may never need to pay your entire student loan balance.

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

Yes, to qualify for an income-driven repayment plan, you’ll need to meet certain requirements, including income. That limit is dependent on factors such as what plan you choose and whether you’re married or have kids. Your monthly payments will also be determined based on your income, among other factors.

How long do IDR plans last?

Your IDR plan will last as long as you continue to qualify, as long as you recertify every year. You will need to make monthly payments on your income-based repayment plan until you either pay off the entire balance of the loan or qualify for loan forgiveness. Your balance will become eligible for loan forgiveness after either 20 or 25 years of qualifying payments, depending on the type of plan and your individual situation.

Are income-driven repayment plans forgiven after 20 years?

All income-driven repayment plans qualify for student loan forgiveness after 25 years, and in some cases sooner. Your remaining loan balance will be eligible for forgiveness after 20 years of qualifying payments for PAYE loans, and 25 years for ICR loans. For both IBR and REPAYE loans, your balance will be eligible for forgiveness after either 20 or 25 years of qualifying payments, depending on the terms of your loan, or your type of study, respectively.

Will income-based repayment hurt my credit score?

No, not as long as you make your monthly payments and meet other loan terms and conditions, your credit score won’t be adversely affected. In fact, by signing up for an IBR plan, you could avoid defaulting on your monthly payments and ensure that your credit score isn’t negatively impacted.

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