Comparing Income-Driven Repayment Plans
If you’re struggling to make your federal student loan payment each month, then you might be looking for ways to make your loans more affordable.
Income-driven repayment plans can help you lower your federal student loan payment by adjusting your payments based on your income.
Here, we'll discuss the different repayment plans so that you can decide which one might work best for you.
What is an income-driven repayment plan?
An income-driven repayment plan sets your monthly student loan payment at an amount that is intended to be affordable based on your income and family size.
Depending on which of the four plans you choose, your payments will be a certain percentage of your discretionary income. This refers to the amount of money you have on hand after paying your regular bills, such as rent and utilities.
Your discretionary income is determined by comparing you and your spouse’s combined income (if you file jointly) to the poverty level of a family your size in your state. Any money you make that is above 150% of the poverty line is considered discretionary.
It’s important to note that your monthly payments may increase or decrease based on your income and family size. That’s why you must provide your lender with updated information each year.
Which income-driven repayment plan is right for you?
The plan that’s best for you often depends on when you first borrowed, your income, and your family size.
The four income-driven plans all have a few things in common:
- They set your monthly payment based on your income (typically between 10% and 20% of your discretionary income).
- They increase your loan term from the standard 10 years to 20 or 25 years.
- They also forgive any remaining loan balance at the end of that term, but you’ll have to pay income taxes on the amount that’s forgiven.
Learn about other strategies for lowering your monthly student loan payments.
Pay As You Earn Repayment (PAYE) plan
If you can qualify, this is a great plan to start with. But, you’ll typically only qualify for PAYE if your student debt is higher than your discretionary income or represents a significant portion of your annual income.
You must be a new borrower as of October 1, 2007 (that is, have no student loans before this date). Plus, you must have received a disbursement on or after October 1, 2011.
Your payment amount is generally 10% of your discretionary income and you’ll have a 20-year repayment period.
Income-Based Repayment (IBR) plan
This plan is ideal for borrowers with high debt in relation to their income. In order to qualify, you’ll have to demonstrate financial hardship based on your adjusted gross income.
If you’re a new borrower on or after July 1, 2014, you will generally pay 10% of your discretionary income with a 20-year repayment term. Otherwise, you will pay 15% with a 25-year repayment term.
Revised Pay As You Earn (REPAYE) plan
REPAYE is a good option if you don’t qualify for the PAYE or IBR plans. This is a revision of the PAYE plan that covers more borrowers.
There is no maximum income requirement for REPAYE, but payments may be higher than the standard 10-year repayment plan amount. Plus, there are fewer limitations on the types of loans and when they were disbursed.
No matter when you first received your loan, you are eligible to apply for REPAYE.
Your payment amount is generally 10% of your discretionary income. You will have a 20-year repayment plan for undergraduate loans and 25 years for graduate loans.
Income Contingent Repayment (ICR) plan
If your income is too high for the PAYE or IBR plans, then the ICR may be a good choice for you.
The ICR is the only income-driven plan that doesn’t require you to prove financial hardship. Additionally, it’s the only income-driven repayment plan available to Parent PLUS borrowers.
Payments will be based on either 20% of your discretionary income or what your payments would be on a fixed 12-year term, and you have a 25-year repayment period.
See also: 4 Income-Driven Repayment Plans That Lower Monthly Payments.