No matter how much student loan debt you have, it’s the monthly payments that truly impact your day-to-day life. Finding space in your budget to pay a hefty student loan bill can be challenging—if not impossible.
If you have federal loans, you probably qualify for an income-driven repayment plan that can can make your monthly payments a lot easier. They are:
Income-driven repayment plans can make your student loan payments more affordable because they are exactly what the name implies: plans driven by your income rather than your loan balance.
Before making any changes, you’ll want to fully understand each option. Allow us to clarify for you.
First things first: no matter which plan you’re interested in, it’s important to remember that these income-driven repayment plans are only available for federal student loans, not private student loans.
1. Pay as You Earn (PAYE)
If you took out a federal direct student loan both before September 30, 2007 and after September 30, 2011, you may be eligible for the PAYE repayment plan. Under PAYE, your monthly payments are set at 10% of your discretionary income and are forgiven after 20 years.
So how do you know what your discretionary income is? There’s a formula. Every dollar you make that is above 150% of the annual poverty line for a family of your size in your state is considered discretionary.
Each year you'll need to submit income verification to calculate your monthly payment and to prove financial hardship. That is, you’ll need to show that the 10-year standard repayment plan for federal loans would be unaffordable to you.
Be forewarned that you will be required to pay federal taxes on any remaining loan balance that is forgiven at the end of 20 years. This is true for all the income-driven repayment options unless you use Public Service Loan Forgiveness, which we will discuss below.
2. Revised Pay as Your Earn (REPAYE)
This plan is available to all graduates with federal student loans (including Direct Loans, Stafford Loans, or Graduate PLUS loans), no matter when you took out your loans.
REPAYE has the same general payment terms as PAYE—10% of discretionary income—but with looser eligibility requirements. If you have older (pre-2007) loans or you can’t show inability to pay under the standard 10-year repayment plan, you may want to look into the REPAYE plan.
REPAYE forgives your remaining balance after 20 years for undergraduate loans, but for graduate loans or loans consolidated with graduate loans, the remaining balance isn’t forgiven until after 25 years of payment.
3. Income-Based Repayment (IBR)
IBR, like PAYE, requires you to show financial hardship. However, this plan is only available to graduates with Direct Loans or loans under the Federal Family Education Loan (FFEL) program. If you’re eligible, IBR sets your monthly payment at 10-15% of your discretionary income, depending on when you took out the loans.
If you received your loans after July 1, 2014, your loan payment under IBR will be capped at 10% and will be forgiven after 20 years of repayment. If you received your loans before July 1, 2014, you’ll be responsible for payments up to 15% of your discretionary income, and your loan balance will be forgiven after 25 years.
4. Income-Contingent Repayment (ICR)
ICR is the only income-driven plan that doesn’t require you to prove financial hardship, so it may be a good option if your income is too high for the PAYE or IBR plans. It’s also the only income-driven repayment plan available to people with Parent PLUS loans.
Your payment under ICR is capped at either:
- 20% of your discretionary income, or
- What your payments would be on a fixed 12-year term.
As with the other income-driven plans, the loan balance is forgiven at the end of the term. For ICR, that’s after 25 years.
Other factors to consider
If you do choose to switch to an income-driven repayment plan, rest assured you’ll still have flexibility in the future. You can switch payment plans anytime.
In fact, depending on changes in your income, you may want to opt for extended or consolidation plans—which aren’t based on income and generally have fixed payments for 25 to 30 years. These plans may have lower payments than income-driven plans as the years progress.
However, if you are planning to take advantage of Public Service Loan Forgiveness (PSLF), you may want to think carefully about switching out of an income-driven plan. Participants in PSLF, a loan forgiveness program for public service employees, have their debt forgiven after 10 years of payment—without having to pay taxes on the remaining balance.
Learn more about how to reduce your monthly student loan payments.