If you’re a federal student loan borrower, you may be wondering, “What is an income driven repayment plan?”. There are many income-based repayment options offered by the government if you’re struggling to make ends meet and need help paying your student loans.
These income-driven plan options can offer you options to pay as little as $0 per month on your loans. Let’s discuss.
What Is An Income Driven Repayment Plan?
First, what exactly is an income driven repayment plan? Simply put, these plans are based on your income to make your potential loan payments more affordable. This option is especially helpful if your student loan debt exceeds your annual income.
The four types of income-driven repayment plans include:
- Income-Contingent Repayment (ICR)
- Income-Based Repayment (IBR)
- Pay-As-You-Earn Repayment (PAYE)
- Revised Pay-As-You-Earn Repayment (REPAYE)
How An Income Driven Repayment Plan Works
Your discretionary income and repayment duration are two of the main requirements that set these repayment plans apart. Let’s dive into the different options.
Pay As You Earn (PAYE)
The first option is the PAYE plan. Your family size, total federal student loan debt, and adjusted gross income and how much you can afford to pay— generally 10% of discretionary income — are taken into account in this plan. Your repayment term will be 20 years, and this plan is best for people who don’t believe their income will increase.
However, this plan is only for Direct Loans. You’ll also need to be assessed as having “partial financial hardship” and have at least one eligible Direct Loan that was first disbursed on or after October 1, 2011. you also have to have been a new borrower on or after October 1, 2007.
Revised Pay As You Earn (REPAYE)
This plan is similar to the PAYE plan and includes the same qualifications like your family size and discretionary income. Also, it’s only available for Direct Loans.
FFELP Loans, Federal Direct Parent PLUS Loans, and Federal Direct Consolidation Loans are all ineligible. However, this plan gives you 20 years of payments for undergraduate loans and 25 years for graduate or professional loans. So this is one of the better options if you have graduate loans.
Income-Based Repayment (IBR)
This plan seems to be the most popular plan for many former students with loans. How much you’ll pay will depend on your adjusted income, family size, and total Direct Loan balance.
Keep in mind that this plan does not include parent PLUS loans. You’ll be eligible to pay your loans across 20 to 25 years, depending on your loan disbursement date. FFEL loans and Perkins Loans can qualify, but only if they’re consolidated.
Income-Contingent Repayment (ICR)
This plan is a decent option for people who have parent PLUS loans. Your repayment will be based on your adjusted gross income, family size, and total student loan debt. This plan can help you if you have Direct Loans, parent loans, FFEL loans, and Perkins Loans, but they will need to be consolidated.
The best income-driven repayment plan will depend on your specific loans and financial situation. But if you have Direct Loans, you can qualify for all of the above options, so you can use the U.S. Department of Education’s loan simulator to see which can help you save the most money over time.
Pros and Cons
So, what are the pros and cons of these repayment plans?
Pros
- Lower monthly payments over time, which is helpful if you don’t make much
- At the end of your repayment period, your remaining balance will be forgiven
- Many people qualify for payments under $200/month, which is a significant savings each month
- You can reapply when needed or if your situation changes
Cons
- You may pay more interest on your loans in the long run
- You may owe income tax on your forgiven amount after your repayment period
- For many of the options, loans issued before 2007 aren’t eligible
- Your spouse’s income may be included when calculating income, even if you file separately
How to Apply
Now that you know the different types of income driven repayment plans, as well as potential pros and cons, let’s talk about how you can apply to one.
- Visit the StudentAid.gov website and sign in. If you don’t have an account, you must create one with your social security number and phone number/email.
- Next, you’ll need to select the type of plan you want to apply for.
- Enter both your personal information and your spouse’s information (if applicable).
- Authorize the portal to temporarily transfer you to the IRS.gov website and use the IRS Data Retrieval Tool to transfer your up-to-date income data.
- Enter your family size, which includes yourself, spouse, dependents, etc.
- Next, select your chosen repayment plan
- Enter Submit
You will need to do this for each of your loans unless they’re consolidated. Every year, you’ll have to recertify by following the same process. So keep your updated income and personal information up to date.
Is An Income Driven Repayment Plan Right For You?
Is an income-driven repayment plan right for you? Possibly! Each option has its pros and cons. But that doesn’t mean it won’t be worth it. We suggest checking out the loan calculator and seeing if you’d qualify and what you could potentially save.
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