What are Income Driven Repayment Plans?

Income driven repayment plans can help you minimize your monthly federal student loans payments. Income-Based or Income-Contingent Repayment will help you to get out of the student loan debt and give forgiveness options. Learn here how to apply for IBR and Pay As You Earn.

Updated by Gowtham Ramesh on 26th August 2019

If you are one among the students who have an overwhelming student loan debt with an average of $29,800 debt in hand, you need to think about income-drive repayment methods to pay off the student loans. With an incredible total debt of $1.56 trillion in student loan debt which is taken by around 45 million borrowers, it is important to find ways to manage your student loan repayment plans. 

There is a way to overcome and reduce heavy student loan payments. Income-Driven Repayment Plans will help you to settle your debts and would definitely be a life savior.

These plans cap your monthly payment to a particular sum of the percentage of your discretionary income, whereas in the Standard Repayment Plan, the repayments are divided over a period of 120 months.


Table of contents


What is Income-Driven Repayment Plan (IDR)?

Income-Driven Repayment (IDR) plan is basically designed to ease your student loan debt at more manageable options by reducing your monthly payment amounts. If you are in need to make lower monthly payments or have an outstanding federal student loans debts which represent a notable share of your annual income, then IDR is right for you.

It's important to see and understand all of its advantages and disadvantages before you enroll in the program. 

There are a total of 4 separate income-driven repayment plans available for the Federal student loan borrowers. But with the four income-driven repayment plans available, choosing the right one can get a little strange and confusing, hence we're here to help.

An in-depth analysis of each of these four income-driven repayment plans can help you decide which plan will suit you the most and will help you with the best plan.

4 Types of Income-Driven Repayment Plans

  • Income-Based Repayment (IBR)

  • Income-Contingent Repayment (ICR)

  • Pay As You Earn (PAYE)

  • Revised Pay As You Earn (REPAYE)


What is Income-Based Repayment (IBR)?

Income-Based Repayment (IBR) is an option that can be opted for even after you have received your loan. It's similar to Pay As You Earn (PAYE) but offers more flexibility than it.

To be qualified for an IBR plan, your planned payments must be lower than the Standard Repayment Plan. You will be required to demonstrate your financial need based on your income.

Eligible loans for Income-Based Repayment (IBR)

There are several loans which are eligible for the IBR plan. They are given below. 

  • Direct Loans (Subsidized and Unsubsidized)

  • Direct PLUS Loan on Graduate or Professional Students (Loans to parents are ineligible)

  • Direct Consolidation loans (except parents made PLUS loans)

  • Federal Family Education Loan (FFEL) (only graduate or professional student loans)

  • FFEL consolidation loans (except Parent PLUS loans)

  • Federal Perkins Loans (If consolidated)

Payment value of IBR

Generally, it's around 10% or 15% on your discretionary income, based on the date of your first loan. Discretionary income is determined on the difference between adjusted gross income and 150% of the federal poverty guideline for family size and state

The 10% amount for new borrowers who didn't borrow of the Direct Loan Program or FFEL program till July 1st of 2014 or after. 15% is for everyone remaining borrowed loan before that date.

Income-based Repayment time

It's usually around 20 to 25 years. It's a 20-year plan for new borrowers after July 1st of 2014 and remaining for 25 years for everyone who took the loan before.

Pros

  • It offers lower monthly payments

  • Your loans might be eligible for loan forgiveness programs if you carry a balance after your repayment period is completed.

Cons

  • You might end up by paying more in interests over the timeline.

  • If your loans are forgiven under the program. The forgiven amount may be considered for taxable income.


Income-Contingent Repayment (ICR)

Income-Contingent Repayment (ICR), such as REPAYE, it does not have an income eligibility requirement. It is the only Income-Driven Repayment Plan below which Parent Plus loans qualify for after the consolidation of that loan into a Direct Loan.

If you are not qualified for other plans and still want a lower payment. then Income-contingent Repayment is the best repayment plan for student loans.

Eligible Loans for Income-Contingent Repayment (ICR)

  • Direct Loans (Subsidized and Unsubsidized)

  • Direct PLUS Loans to Graduate or Professional students

  • Direct Consolidation Loans

Under Consolidated Loans

  • Direct PLUS Loans to parents

  • Federal Stafford Loans(Subsidized and Unsubsidized)

  • FFEL PLUS Loans

  • FFEL Consolidation Loans

  • Federal Perkins Loans

Payment value in ICR

20% of your discretional income, the difference between your annual income and 100% of the federal poverty guideline for family size and states.

The amount payable on a 12 year is fixed Repayment plan, adjusted for income.

ICR Repayment time 

It's usually around 25 years.

Pros

  • It's easy to qualify as there is no income eligibility requirement

  • you may be eligible for loan forgiveness on the completion of your repayment plans.

  • Parent PLUS Loans can qualify once it's consolidated their loan into a Direct Loan.

Cons

  • It has a higher potential payment amount of all the Income-Driven Plans

  • Your Payment might not be lower than the Standard Repayment plan

  • Forgiven Loans could be considered on taxable income.


Pay As You Earn (PAYE)

Pay As You Earn is the newest income-driven repayment plan available to help borrowers manage their student loan debt. It's more or less like IBR with a stringent requirement.

For qualifying for PAYE providing a financial need statement is required. Must be a reasonably new borrower, a new one as on 1st of October 2007 and received a disbursement on a Direct Loan after 1st of October 2011.

your Prospective payment should be smaller than a standard repayment plan

Eligible loans for Pay As You Earn (PAYE)

  • Direct Loans (Subsidized and Unsubsidized)

  • Direct PLus Loans to graduate or professional student

  • Direct Consolidation Loans (except parents made PLUS loans)

Under Consolidated Loans

  • Federal Stafford Loans (Subsidized and Unsubsidized)

  • FFEL PLUS Loans to Graduate or Professional Students

  • FFEL Consolidation Loans

  • Federal Perkins Loans.

Payment Value in PAYE

10% of your discretionary income between your annual income and 150% of the federal poverty guideline for family size and state.

PAYE Repayment Time

It's usually around a period of 20 years.

Pros

  • It offers the lower payment amount option for all of its eligible borrowers

  • The loans are eligible for the loan forgiveness program after 20 years of repayment.

Cons

  • You must be a new borrower to qualify this repayment plan

  • The forgiveness of loans might be considered for taxable income after it's done.


Revised Pay As You Earn (REPAYE)

Revised Pay As You Earn (REPAYE) which is available after December of 2015, which is the newest Income-Driven Repayment Plan.

It's more similar to PAYE with a few key differences. The usual well-known difference is the fact that you are eligible for the regardless of when you have taken out your first Federal Student Loan. no need to describe the financial need.

Eligible Loans for Revised Pay As You Earn (REPAYE)

  • Direct Loan (subsidized and Unsubsidized)

  • Direct Plus Loan to graduate and professional students

  • Direct Consolidation Loan

Under Consolidated Loans

  • Federal Stafford Loans (Subsidized and Unsubsidized)

  • FFEL PLUS Loans to Graduate or Professional Students

  • FFEL Consolidation Loans

  • Federal Perkins Loans

REPAYE Payment Value

10% of your discretionary income between your annual income and 150% of the federal poverty guideline for family size and state.

Repayment Time

It's usually around a period of 20 years to 25 years. if it's a 20-year term all of your loans are under the plan of undergraduate study. If it's a  25-year term all of the loans are under the plan of Graduate or Professional Study.

Pros

  • It offers the lower payment amount option for all of its eligible borrowers

  • The loans are eligible for the loan forgiveness program after 20 years of repayment.

Cons

  • The Borrower with PLUS loan that is Graduate and Professional Student Loans need to make payments for a period of 25 years before qualifying for forgiveness.

  • Your spouse income will also be involved in the monthly payment calculation regardless of tax filing status

  • Forgiven of loans may be considered for taxable income once you have forgiven the loan.


How to choose a plan?

Choosing the Income-Driven repayment plan can help you to get manage of your payments but which is the best one for the student loan repayment plan.

Let's get started Determining whether the qualification is made based on the income that you earn and the family size that you have. It's very easy and simple to do it by yourself by calculating the household income and compare it with the Federal Poverty Guideline.


Advantages

Through Income-Driven Platform many students are possible to do higher education which includes a Master's Degree.

A student of first-generation paying their own bills with their entry-level salary which was small but along her potential earnings it's expected to rise as she progresses to grow in the corporate ladder.

Example:-

If you had taken a loan of $75,000 as a student loan from a lender during the period of moving from Graduate school to College with a standard 10-year repayment it would be around $1,300 out of your average annual salary of $35,000. Under Income-Driven Repayment plan, it would be just $270.

Graduates out of school with underemployed or in Low-Salary fields. The monthly paycheck is not sufficient to cover living expense and their debt. Alternatively, income-driven repayment plans can help individuals to take care of their debt burden and rest for their use.

Monthly Payment is set on various factors from Income and your family size. Every year, it's mandatory to apply for alternative payment options. If you lose a portion of your income or have a baby, the monthly payment can drop even further.


Disadvantages

The income-driven repayment plans are not without their fair share of drawbacks.

The senior advisor cautions that while alternative repayments options are beneficial but also extremely expensive as you pay interest for a long period of time

If you are struggling to pay for your essentials needs, then income-driven plan makes sense. Things to understand are that you will pay back much more in term of interest for a long period of time.

If you can free up money by slacking off on eating out or eliminating cable to stay on Standard 10-year plan, would be great in the long run.

Income driven repayment plan form

source - pexels.com

Many people don't have a clue on how taxes work comes into the action of student loan forgiveness. If you are in Income-driven plan such as PAYE or REPAYE for a period of time between 20 to 25 years. Then the balance amount is forgiven.

The amount that is forgiven is considered for taxable income. where owing of thousands of dollars as a tax to the federal government.

If you are considering to receive on loan forgiveness after 20 years to 25 years on an income-driven repayment plan make sure to pay one final bill in the form of a tax bill.


Worried about college tuition? Learn about student loans


Prefer to take your IDR plans carefully

Income-driven repayment plans can be a great way to reduce federal student loan payments. Also, important to look at things on longer-term benefits with consequences.

IDR plans can really help a lot in the present. But in the future, there is a lot of taxable income or forgiven loans which needs to be paid more in interest over time. Set clear goals and choose the right repayment plans for you.


How to apply

Before going ahead into the Income-driven repayment plan contacting your loan service provider asking any doubts on (IDR) will help you better in decision making on the 4 provided plan which goes well with your need.

  1. To apply submission of an application called Income-Driven Repayment Plan Request.

  2. The application can be submitted online at StudentLoans.gov or on a paper form which can be collected from your loan provider.

  3. The application allows you to select one of the four income-driven repayment plans by name or to the loan service provider based on the plan which qualifies for you on the income-driven plan with lower monthly payments.

  4. If you have multiple services providers for the loans you must request each on the repay under an income-driven plan.

  5. While applying you are required to provide income information which will determine your eligibility for PAYE or IBR plans and to calculate monthly repayment plans. Either on Adjusted Gross Income (AGI) or alternative documentation of income.

  6. If you have filed a federal income tax return  in the past 2 years or difference in the income report on the recent tax return, alternative documents of your income are required to determine the eligibility and provide a monthly payment amount

  7. Based on the application submitted through electronically or a paper request form with the submission of all the required documents. It may take a few weeks for your service provider to process it.

  8. As they need to obtain the documentation of your income and family size.

  9. If the existing loans are being paid under different repayment plan the loan service provider needs to apply for forbearance to your student loan account. while processing the request for Income-Driven Repayment Plan.


Learn more on Repayment options for student loans


Calculation of monthly repayment

Usually, in payment amount below an income-driven repayment plan is based on the percentage of your discretionary income. This percentage varies depending on the plan you have chosen. The table below will give you a clear idea of how the payment amounts are set under each income-driven plans. Based on your Income and Family size, sometimes you may not have zero monthly payment too.

Income-Driven Repayment Plan Payment Amount
IBR Plan 10%of your Discretionary income, If you are a new borrower on or after 1st of July 2014, not more than 10-years of Standard Repayment Plan
15%of your discretionary income if you are an existing borrower on or after 1st of July 2014, not more than 10-years of Standard Repayment Plan
ICR Plan 20% of your Discretionary income orWhat’s the amount you pay on a fixed payment on a repayment plan for a course of 12 years, adjusted to meet your income.
PAYE Plan 10%of your Discretionary Income on General, If not more 10 years Standard Repayment Plan amount
REPAYE Plan 10% of your Discretionary Income.

Duration of repayment

Income-driven repayment plans have different types of repayment periods based on the plan you choose.

Income-Driven Repayment Plan Repayment Duration
IBR Plan 20 Years if you are a new borrower on or after the 1st of July 2014.
25 years if you are an old borrower on or after the 1st of July 2014.
ICR Plan 25 Years
PAYE Plan 20 Years
REPAYE Plan 20 Years if all the loans you are repaying under the plan received for undergraduate study
25 Years if any of your loans are repaying under the plan received for graduate or professional study

Pick what's best for you

Reducing your monthly payments is attractive, but the fact to remember is on long term relationships how will it be. Opting for long term repayment plans you don't need it, but end up paying thousands in interest.

Forgiven balance is treated as taxable income where it's taxable major bill after 20 - 25 years of repayment

Before making any decision on your student loan make a good analyzing of all options available for you including consolidation and student loan refinancing.

Income Driven Repayment plans with pay as you earn

source - pexels.com

Whether or not income-driven repayment plans make sense for you is on the following of factors like your unique Situation. Your loan amount and income with alternative options are for loan forgiveness before signing up for a long period plan.

Monthly Payments and the longer repayment period, you would be paying a lot more in the interest over time.  If you can afford to make sense go ahead with the standard repayment plan.


FAQ's

  Are income-driven repayment plans a good idea?


Since there are no income restrictions and this offers the lowest monthly payment available. This plan also offers the shortest repayment period.

  Does the income-driven repayment plan affect my credit score?


Signing up for any repayment plan will not help your credit score, but making your payment on time will definitely help in improving your credit score.

  Is PAYE or REPAYE better?


Both are federal income-driven repayment plans and forgive any remaining balance after the repayment period. REPAYE is considered to be better for single borrowers.

  Is Income-Based Repayment based on your household income?


IBR helps you make payments based only on your income, make sure you file a separate tax return from your spouse.

  Which is preferred IBR or PAYE?


Both payment plans calculate your monthly payments based on your income, the PAYE offers a shorter repayment plan when compared to IBR for new borrowers.

   Should I switch from IBR to PAYE?


If you\'ve been out of school for a few years then you should consider switching from IBR to PAYE.