Income-Driven Repayment Plans

By Daniel SachsUpdated September 14, 2017


In this article we take a look at federal income-driven repayment plans. The US Department of Education has a range of income-driven repayment plans which are designed to be more affordable than standard plans, calculated as a percentage of your discretionary income.

There are four income-driven repayment plans available for federal loans:

  • Pay As You Earn Repayment Plan (PAYE Plan)
  • Revised Pay As You Earn Repayment Plan (REPAYE Plan)
  • Income-Based Repayment Plan (IBR Plan)
  • Income-Contingent Repayment Plan (ICR Plan)

Deciding between these four repayment plans can be tricky as each one has their own requirements in terms of who qualifies, how much you have to pay each month, the length of the repayment period, the types of loans that can be repaid under the plan as well as the pros and cons associated with each. This article compares the details of each plan in turn to help you make the right decision for you.

Overview of plans

Pay As You Earn Repayment Plan (PAYE Plan)

PAYE lets you contribute a percentage of your income toward your student loans. You’ll also have the rest of your balance forgiven if anything is left after 20 or 25 years of payments.

However, you must be a new borrower as of Oct. 1, 2007 and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011.

PAYE requires participants to show a partial financial hardship; the amount you owe with PAYE must be less than what you’d owe on the standard 10-year plan.

Loan eligibility

  • Direct Loans (both Subsidized and Unsubsidized)
  • Direct PLUS Loans made to graduate or professional students only
  • Direct Consolidation Loans that did not repay any PLUS loans made to parents
  • Federal Stafford Loans (both Subsidized and Unsubsidized) (if consolidated)
  • FFEL PLUS Loans made to graduate or professional students (if consolidated)
  • FFEL Consolidation Loans FFEL Consolidation Loans that did not repay any PLUS loans made to parents (if consolidated)
  • Federal Perkins Loans (if consolidated)

Payment amount

  • 10% of your discretionary income

Repayment period

  • 20 years

Revised Pay As You Earn Repayment Plan (REPAYE Plan)

REPAYE is the result of the US government revising the PAYE plan in 2015 in an effort to open up eligibility to additional borrowers. Unlike PAYE, where qualification is based on your income and amount of outstanding debt, with REPAYE any borrower with an eligible federal direct loan qualifies.

Balances for undergraduate degree loans are forgiven after you make 20 years of eligible payments. Balances for graduate and professional degrees, or a combination of graduate and undergraduate degrees, are forgiven after 25 years of eligible payments.

 Loan eligibility

  • Direct Loans (both Subsidized and Unsubsidized)
  • Direct PLUS Loans made to graduate or professional students only
  • Direct Consolidation Loans that did not repay any PLUS loans made to parents
  • Federal Stafford Loans (both Subsidized and Unsubsidized) (if consolidated)
  • FFEL PLUS Loans made to graduate or professional students (if consolidated)
  • FFEL Consolidation Loans FFEL Consolidation Loans that did not repay any PLUS loans made to parents (if consolidated)
  • Federal Perkins Loans (if consolidated)

Payment amount

  • 10% of your discretionary income

Repayment period

  • 20 years if all loans you’re repaying under the plan were received for undergraduate study
  • 25 years if any loans were received for graduate or professional study

Income-Based Repayment Plan (IBR Plan)

Income-Based Repayment is the most widely available federal income-driven repayment plan. Income-driven repayment plans can help borrowers keep their loan payments affordable by capping your monthly payments, based on a certain percentage of your discretionary income.

 Loan eligibility

  • Direct Loans (both Subsidized and Unsubsidized)
  • Direct PLUS Loans made to graduate or professional students only
  • Direct Consolidation Loans that did not repay any PLUS loans made to parents
  • Federal Stafford Loans (both Subsidized and Unsubsidized)
  • FFEL PLUS Loans made to graduate or professional students
  • FFEL Consolidation Loans FFEL Consolidation Loans that did not repay any PLUS loans made to parents
  • Federal Perkins Loans (if consolidated)

Payment amount

  • 10% of discretionary income if you’re a new borrower on or after July 1, 2014
  • 15% of discretionary income if you’re not a new borrower on or after July 1, 2014

Repayment period

  • 20 years if you’re a new borrower on or after July 1, 2014
  • 25 years if you’re not a new borrower on or after July 1, 2014

Income-Contingent Repayment Plan (ICR Plan)

The ICR plan is designed to make loan repayment easier for students who intend to pursue jobs with relatively lower salaries, such as careers in public service. It pegs monthly payments to the borrower’s income, family size, and total amount borrowed. The monthly payment amount is adjusted annually, based on changes in annual income and family size.

 Loan eligibility

  • Direct Loans (both Subsidized and Unsubsidized)
  • Direct PLUS Loans made to graduate or professional students
  • Direct PLUS Loans made to parents (if consolidated)
  • Direct Consolidation Loans that did not repay any PLUS loans made to parents
  • Direct Consolidation Loans that repaid PLUS loans made to parents
  • Federal Stafford Loans (both Subsidized and Unsubsidized) (if consolidated)
  • FFEL PLUS Loans made to graduate or professional students (if consolidated)
  • FFEL PLUS Loans made to parents (if consolidated)
  • FFEL Consolidation Loans FFEL Consolidation Loans that did not repay any PLUS loans made to parents (if consolidated)
  • Federal Perkins Loans (if consolidated)

Payment amount

  • The lesser of either 20% of your discretionary income or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income.

Repayment period

  • 25 years

Comparing pros and cons of each plan

Here are some of the key considerations when deciding if an income-driven repayment plan is right for you:

  1. You are struggling to afford the standard plan. You would be making lower monthly payments than you would under the standard 10-year plan by extending out the repayment period. The flip side of this of course is that you are likely to pay more in interest under the income-driven payment plans and it will take you longer to pay off your total debt.
  2. If you can qualify for Public Service Loan Forgiveness (PSLF). Under PSLF and if eligible, you can get your remaining loan balance forgiven tax-free after you make 120 qualifying loan payments. It is important to make the most of those payments on a federal income-driven repayment plan to benefit from PSLF. Otherwise, you’ll end up paying off the loan before you’re eligible for forgiveness.
  3. Taxes on Forgiven debt. Though these repayment plans may allow any remaining loan balance to be forgiven after 20 or 25 years, the forgiven balance may be taxable as income.
  4. Not all loans qualify. As we’ve discussed above, Income-Driven Repayment Plans are only available for certain types of federal loans.

The table below compares some of the pros and cons of each individual plan in turn.

Plan TypeProsCons
PAYE
  • Lowest monthly payments as a percentage of discretionary income.
  • The period of debt forgiveness is just 20 years.
  • You must be a new borrower as of Oct. 1, 2007 and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011.
  • Forgiven loans may be considered taxable income.
REPAYE
  • Lowest monthly payments as a percentage of discretionary income.
  • Loan forgiveness eligibility after 20 years (for borrowers with undergraduate loans only).
  • Repayment period of 25 years if any loans were received for graduate or professional study
IBR
  • Lowers monthly payments.
  • Loans are eligible for forgiveness if borrowers carry a balance after the repayment period is complete.
  • Borrowers can end up paying more in interest over time.
  • Forgiven loans treated as taxable income
ICR
  • It’s easier to qualify since there’s not an income eligibility requirement.
  • You may also be eligible for loan forgiveness.
  • Highest percentage and payment amounts of all of the income-driven plans.
  • Forgiven loans could be considered taxable income.

 

It’s important to remember that you aren’t stuck with a specific repayment plan once you’ve made a choice. You can always change plans down the line.

How to apply

You need to submit an application called the Income-Driven Repayment Plan Request.

The application allows you to select an income-driven repayment plan by name, or to request that your loan servicer determine what income-driven plan or plans you qualify for, and to place you on the income-driven plan with the lowest monthly payment amount.

When you apply, you’ll be asked to provide income information that will be used to determine your eligibility for the PAYE or IBR plans (demonstrate a ‘partial financial hardship’ as determined by income, family size, and loan amount) and to calculate your monthly payment amount under all income-driven repayment plans.

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