Student loan debt can feel like a huge burden, especially if your monthly payments are outrageously high. In some cases, your student loan payments may even be more than your rent or mortgage.
A fist full of dollars
Luckily, there are ways to make your monthly student loan payments more reasonable. If you have federal student loans, you can look into an income-driven repayment plan (sorry, this doesn’t apply to private loan borrowers).
The various income-driven repayment plans, which include income-based repayment plans, base your monthly payments on your income. This makes payments more affordable than a standard 10-year plan.
But with acronyms like IBR, ICR, PAYE, and more, choosing a plan can be a little overwhelming and confusing. I’m here to break it down for you, so you can decide which income-driven repayment option is the best for you.
1. Income-Based Repayment (IBR)
Income-Based Repayment, which is commonly referred to as IBR, caps your monthly payments based on a certain percentage of your discretionary income. This plan is a good option for borrowers who are struggling with monthly payments and need something more manageable.
Eligible loans:
Direct Loans (both Subsidized and Unsubsidized)
Direct PLUS Loans (loans made to parents are ineligible)
Direct Consolidation Loans
Federal Stafford Loans (both Subsidized and Unsubsidized)
FFEL PLUS Loans made to graduate or professional students (FFEL PLUS loans made to parents are ineligible)
FFEL Consolidation Loans qualify for Income-Based Repayment
Federal Perkins Loans (if consolidated)
Note that nearly all federal loans are eligible for Income-Based Repayment, with the key exception that loans provided to parents are not. However, here’s the more important part: in order to qualify for IBR, your prospective payment must be lower than what it would be on the Standard Repayment Plan, and you must demonstrate financial need based on your income (more on that later).
Payment amount: 10 – 15 percent of discretionary income, depending on the date of the first loan. The 10 percent amount is for new borrowers who never borrowed from the Direct Loan or Federal Family Education Loan (FFEL) Program) until July 1, 2014 or later. The 15 percent amount is for everyone who began borrowing before that date.
Repayment period: 20 – 25 years. It’s a 20-year term for new borrowers as of July 1, 2014 or later, and 25 years for everyone else.
Pros: IBR lowers monthly payments. Also, loans are eligible for forgiveness if borrowers carry a balance after the repayment period is complete.
Cons: Borrowers can end up paying more in interest over time. In addition, current IRS tax regulations may consider forgiven loans taxable income, which means that borrowers could be hit with a tax bill in twenty years or so.
2. Pay As You Earn (PAYE)
Pay As You Earn is one of the newest income-driven repayment plans to help borrowers manage their student loans. Unveiled in 2012, this plan is similar to IBR but has stricter requirements.
To qualify for PAYE, you need to demonstrate need and be a fairly recent borrower — you must be a new borrower as of Oct. 1, 2007 (meaning you didn’t have any student loans before this time) and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011.
Eligible loans:
Direct Loans (both Subsidized and Unsubsidized)
Direct PLUS Loans (loans made to parents are ineligible)
Direct Consolidation Loans
Eligible only if consolidated:
Federal Stafford Loans (both Subsidized and Unsubsidized)
FFEL PLUS Loans
FFEL Consolidation Loans qualify for Income-Based Repayment
Federal Perkins Loans
Just like IBR, to take advantage of PAYE, your prospective payments must be smaller than what your payments would be on a Standard Repayment Plan.
Payment amount: 10 percent of discretionary income.
Repayment period: 20 years.
Pros: Allows for payments that are an even lower percentage of discretionary income. Also, these loans are eligible for loan forgiveness after 20 years.
Cons: You must be a new borrower as of dates above, so not everyone is eligible. As with IBR, forgiven loans may be considered taxable income.
3. Revised Pay As You Earn (REPAYE)
REPAYE, which became available in December 2015, is the newest income-driven repayment plan. This plan is similar to PAYE with a few differences.
The most notable difference: anyone, regardless of when the started borrowing federal student loans. It’s estimated that REPAYE allows about 5 million more borrowers to qualify to cap their student loan repayments at 10 percent of discretionary income.
Eligible loans:
Direct Loans (both Subsidized and Unsubsidized)
Direct PLUS Loans (loans made to parents are ineligible)
Direct Consolidation Loans
Eligible only if consolidated:
Federal Stafford Loans (both Subsidized and Unsubsidized)
FFEL PLUS Loans
FFEL Consolidation Loans qualify for Income-Based Repayment
Federal Perkins Loans
Unlike IBR and PAYE, your prospective payments are not capped at the Standard Repayment Plan amount. Instead, your monthly payments will 10 percent of discretionary income regardless of this factor.
Payment amount: 10 percent of discretionary income.
Repayment period: 20 – 25 years.
Pros: Allows for payments that are an even lower percentage of discretionary income compared to IBR. Loans are eligible for loan forgiveness after 20 years (for borrowers with undergraduate loans only). Interest subsidy available if your monthly payments don’t cover all interest charges.
Cons: Borrowers with graduate student loans must make payments for 25 years before qualifying for forgiveness. Spouse’s income is included in monthly payment calculation, regardless of tax filing status. As with other plans, forgiven loans may be considered taxable income.
4. Income-Contingent Repayment Plan (ICR)
The Income-Contingent Repayment plan is a bit different from the other two income-driven repayment plans as there is no income eligibility requirement.
But if you don’t qualify for those other plans and still want a lower payment, the Income-Contingent Repayment plan may be your best option.
Eligible loans:
Direct Loans (both Subsidized and Unsubsidized)
Direct PLUS Loans (loans made to parents ARE eligible if they are consolidated)
Direct Consolidation Loans
Eligible only if consolidated:
Federal Stafford Loans (both Subsidized and Unsubsidized)
FFEL PLUS Loans
FFEL Consolidation Loans qualify for Income-Based Repayment
Federal Perkins Loans
Under ICR, your monthly payment is always based on your income and family size and may even be higher than what it would be on a Standard Repayment plan.
You’ll want to make sure that ICR is of benefit for you before choosing this plan over a Standard Repayment Plan.
Payment amount: 20 percent of your discretionary income.
Repayment period: 25 years.
Pros: It’s easier to qualify since there’s not an income eligibility requirement. You may also be eligible for loan forgiveness.
Cons: Highest percentage and payment amounts of all income-driven plans. Your payment on ICR may not be lower than what it would be on a Standard Repayment plan. Forgiven loans could be considered taxable income.
Choosing a plan:
Choosing an income-driven repayment plan that is right for you is important It can help you manage your payments. But which one is best for you? Here are some things you should consider before choosing a plan.
What will your estimated payments be?
Will you be able to pay off your loan before the repayment period is over or will you have to have your loans forgiven? Consider the potential tax ramifications of your decision.
Do you qualify based on your income and family size?
Going on an income-driven repayment plan may seem like a great way to pay less on your student loans, but you may actually pay a lot more in interest over time. If you can afford it, it makes sense to go with a Standard Repayment Plan.
But, if you’re struggling with payments, an income-driven repayment plan can help relieve borrowers.
Applying for Income-Driven Repayment plans:
Getting on an income based plan involves dealing with your current loan servicers and the Department of Education. If you’re baffled by the process, you might want to consult with me. I can either just point you in the right direction, or prepare the whole application for you.
For Income-Based Repayment and Pay As You Earn, you must demonstrate financial need to be eligible. Borrowers can submit their Adjusted Gross Income (AGI) through a federal tax return or online with the IRS Data Retrieval Tool, which syncs your tax information to your application.
If you haven’t filed a tax return or have no income to report, you can provide alternative documentation such as pay stubs and unemployment benefits.
Bottom Line:
Income-driven repayment plans can be a great way to reduce your federal student loan payments, but it’s important to look at the long-term benefits and consequences.
On the one hand, these plans can help you in the present, but in the future you may deal with taxable income on forgiven loans and may pay more in interest over time. Be clear on your goals and choose the right repayment plan for you.