Income-Driven Repayment Plan

Are your student loan payments too high? If student loan payments are eating up too large a percentage of your monthly income, you may be eligible for an Income-Driven Repayment Plan — that is, a plan that calculates your monthly payment on the basis of your income, not on the basis of the amount you owe. If your income is low enough, you could even be eligible for a payment of $0 per month! What’s more, if you pay on your loan using an income-driven repayment plan and you still have a balance after 20 or 25 years (depending on the loan and plan), the remaining balance will be forgiven!

So the advantages of income-driven repayment plans are clear:

Payments based on your income, not on the amount you owe

The possibility of $0 monthly payments, depending on your income

The chance to have your balance forgiven after 20 or 25 years of payments under the plan

Some programs are capped at 25 Years!

The Down-Side

While there are great advantages to an income-driven repayment plan, there are disadvantages, too. Specifically:

Because an income-driven plan will extend the life of your loan, it means you’ll pay more interest . . . perhaps much more.

If you have a portion of your loan forgiven after 20 or 25 years, the amount that is forgiven could qualify as income, subject to income tax.

So it’s important to consider carefully the pros and cons of an income-driven repayment plan for your specific situation before you make a decision about choosing one of these plans. That’s why we’ve compiled this information. If you have questions, just contact us for help.

1. Who’s Eligible?

The type of borrower you are will play a role in determining which income-driven repayment plan you’re eligible for.

If you are a Direct Loan borrower, you are eligible for all four income-driven repayment plans. So how do you choose? Find out which plan may provide the lowest monthly payment amount—and to do that you may contact us for help. (NOTE that the PAYE plan is only available to new borrows on or after October 1, 2007, who received a Direct Loan disbursement on or after October 1, 2011.)

If you are an FFEL Loan borrower, you have only one option: the IBR plan. (NOTE that if you consolidate your FFEL Loan into a Direct Consolidation Loan, then you’ll also be eligible for the PAYE, REPAYE, and ICR plans. Terms and conditions may vary, depending upon when you received your federal student loans.)

The amount of your income also plays a role in determining your eligibility.

Both the REPAYE and the ICR plans have no specific income requirements. However, to be eligible for the PAYE and IBR plans, your income must be low compared to your eligible federal student loan debt.

2. What Types of Loans Are Eligible?

The PAYE and REPAYE plans are available for all Direct Loans except Parent PLUS Loans and Consolidation Loans that repaid Parent PLUS Loans.

The same is true for ICR plan, except that ICR plans may be used to repay Consolidation Loans made after July 1, 2006 that repaid Parent PLUS Loans.

The IBR plan can be used to repay all Direct Loan and FFEL Program Loans except Parent PLUS Loans and Consolidation Loans that repaid Parent PLUS Loans.

3. How Much Will You Pay?

Discretionary Income

In all income-driven repayment plans, the amount of your monthly payment will be calculated on the basis of the money you make, not the money you owe—specifically, your payment will be based on your discretionary income. Generally speaking, discretionary income is the amount of money you have to spend each month after you pay for the essentials, like rent, utilities, and food. While you can’t really decide not to pay your rent in a given month, you can decide not to go shopping for new clothes—the clothes portion is discretionary. Rather than try to figure out what each person’s expenses are essential compared with their discretionary income, the federal government has a way of calculating your discretionary income: They start with your adjusted gross income (i.e., the income, after all legitimate deductions, on which your federal income tax is calculated, also referred to simply as AGI). Then they subtract 150% of the federal poverty line for your family size. The difference between your AGI and 150% of the federal poverty line for your family size is your discretionary income—and that’s the number that will form the basis for calculating your monthly loan payment.

Repayment Amounts

Now, the government doesn’t expect you to spend all of your discretionary income on student loan payments! Depending upon the income-driven repayment plan you choose, your monthly payment will be 10%, 15%, or 20% of your monthly discretionary income.

For both the PAYE and the REPAYE plans, your monthly loan payment will generally be 10% of your monthly discretionary income.

For the IBR plan, your monthly loan payment will generally be 10% of your monthly discretionary income IF you are a new borrower on or after July 1, 2014; BUT it will generally be 15% of your monthly discretionary income IF you’re not a new borrower.

For the ICR plan, your monthly loan payment will generally be the lesser of 20% of your monthly 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.

Payment Caps

It’s worth knowing that some income-driven repayment plans also have caps on the amount you can be expected to pay, further reducing your burden.

The REPAYE and the ICR plans have no caps, and this means that your monthly payment under these plans could be higher than your monthly payment under a 10-year Standard Repayment Plan, so be sure to calculate your payments carefully so that you get the best option for your specific situation. For help with this, don’t hesitate to contact us.

With the PAYE and IBR plans, your monthly payment amount is capped so that your payment is never more than it would be with a 10-year Standard Repayment Plan, based on the amount you owed at the time you entered the income-driven repayment plan.

Recertifying Your Loan

Once you are enrolled in an income-driven repayment plan and given a monthly payment amount, it is still possible that the amount of your monthly payment may change from time to time. Since your payment amount is dependent upon your income level and the size of your family, changes in either of these factors will result in changes in your monthly payment amount.

Under all plans, you are required to recertify your income and family size information every year, and changes will be calculated into your loan payment amount at that time. However, if you experience a significant lowering of your income or an increase in your family size, you should report that information immediately, since this information will lower your monthly payment amount. You do not have an obligation to report increases in income or decreases in family size except at the time of your annual recertification.

NOTE that, if you are enrolled in a PAYE or IBR plan and your income reaches a level that does not qualify for these plans, you may still remain enrolled in your income-driven repayment plan, but your monthly payment will no longer be calculated on the basis of your income; it will, instead, be the amount that you would have to pay under the 10-year Standard Repayment Plan. The advantage of remaining enrolled in your PAYE or IBR plan at this point is that you still qualify for forgiveness of your balance after 20 or 25 years (depending upon your plan). And, of course, if at any time your income level or family size changes again such that you are eligible for an income-driven payment amount, you will be allowed to return to making payments based on your discretionary income. So, once enrolled in one of these plans, it is worth considering remaining enrolled even if your income increases to the point at which an income-driven repayment plan is not really necessary.

Married Borrowers

It’s also worth noting that, if you are married and file a joint tax return, your monthly payment amount under all income-driven repayment plans will be based on the combined income and loan debt of you and your spouse. Under the REPAYE plan, this is true whether or not you decide to file a joint return, unless you are separated from your spouse and unable to reasonably access your spouse’s income. Under the ICR plan, you and your spouse can even choose to repay jointly.

4. How Long Will You Pay?

One of the biggest advantages of income-driven repayment plans is the fact that, in all plans, the outstanding balance on your loan will be forgiven after 20 or 25 years of payments, depending upon your plan:

With the PAYE plan, your balance will be forgiven after 20 years of qualifying loan payments.
With the REPAYE plan, your balance will be forgiven after 20 years of qualifying loan payments, IF the loans being repaid under this plan were for undergraduate study; BUT if the loans being repaid under this plan were for graduate or professional study, then your balance will be forgiven after 25 years of qualifying loan payments.
With the IBR plan, your balance will be forgiven after 20 years of qualifying loan payments, IF you’re a new borrower on or after July 1, 2014; BUT if you are not a new borrower, then your balance will be forgiven after 25 years of qualifying loan payments.
With the ICR plan, your balance will be forgiven after 25 years of qualifying loan payments.

NOTE that, in all cases, any amount of your loan that is forgiven may be considered income for the purposes of calculating your income tax obligation.

Leaving Your Income-Driven Repayment Plan

Once you are enrolled in an income-driven repayment plan, you may still opt out of the plan. If you have chosen a PAYE, REPAYE, or ICR plan, you can simply choose any other repayment plan for which you are eligible. However, if you have chosen the IBR plan, you will automatically be placed in the Standard Repayment Plan. Only once you have made at least one payment under the Standard Repayment Plan (or under a reduced-payment forbearance, if you are eligible for such a forbearance) will you then be allowed to choose another repayment plan.

NOTE that, in all cases, you will not be considered eligible for an income-driven repayment plan if you are currently in default on your student loan. If you are in default and wish to be enrolled in an income-driven repayment plan, you must first get out of default status. For information on getting out of default, see our Student Loan Rehabilitation page, or contact us.

Getting Started

Getting started with an income-driven repayment plan begins by completing an application. You can find the application online at StudentLoans.gov, or you can request a paper copy of the application form from your loan servicer. Of course, you can also contact us to help you with this process.

There is only one application, used for all four income-driven repayment plans. When completing the application, it is possible to choose one specific plan, whether PAYE, REPAYE, IBR, or ICR. However, it is also possible to request that your loan servicer place you in the plan that will give you the lowest monthly payment. Because of the many considerations that go into determining your payment under each plan, it is best to consider your long-term and short-term goals. For some borrowers, they simply desire to be placed in a program that provides the lowest payments at the current time and then they can reevaluate their situation on a yearly basis probably a good idea to request that you be placed in the plan that will give you the lowest monthly payment rather than choosing the plan for yourself.

As you can see, income-driven repayment plans can seem rather complex! But you don’t have to figure all of this out on your own. Now that you know that it’s possible to have your monthly loan payment calculated on the basis of your income instead of on the basis of the amount you owe, contact us and let us help you get started applying for an income-driven repayment plan today!