Often when people use the term “income-based repayment,” what they really mean are all the plans that fall under federal “income-driven repayment. The “Income-Based Repayment Plan” (IBR) is only one of those income-driven repayment (IDR) plans.
Other income-driven plans include Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE) and Income-Contingent Repayment (ICR).
The fact that the federal government decided to name one of its income-driven plans “income-based repayment” is unnecessarily confusing. Consequently, many people mistakenly say they’re on Income-Based Repayment when they’re actually on PAYE, REPAYE or ICR.
How many income-driven repayment plans are there?
There are currently four federal income-driven student loan repayment plans.
- IBR: Income-Based Repayment
- ICR: Income-Contingent Repayment Plan
- REPAYE: Revised Pay As You Earn
- PAYE: Pay As You Earn
The remainder of this guide breaks down the similarities and differences between these four plans. You’ll also learn how to use these plans and what forgiveness options each come with.
How to estimate your monthly payment under each repayment plan
With each of the IDR plans, your payment will be a percentage of your discretionary income. Before taking a look at the percentage that each plan uses, it’s important to understand what “discretionary income” even is.
What is discretionary income?
While many people think of discretionary income as being their income minus expenses, the U.S. Department of Education determines your discretionary income a different way.
For federal student loans, your discretionary income is whatever money you bring in that’s over 150% of the federal poverty guidelines.
For example, the current poverty guideline for a family size of one is $12,490. When you take $12,490 and multiply it by 150%, you get $18,735. If your adjusted gross income (AGI) was $40,000, you would subtract $18,735 from that number to find your discretionary income — $21,265 ($40,000 – $18,735).
For a more detailed explanation of how discretionary income works, check out Student Loan Planner’s discretionary income guide.
How monthly payments are calculated
This is how your monthly payment amount is calculated under each IDR plan.
If this all seems a bit confusing to you, you’re not alone! The good news is you don’t have to do a bunch of manual math calculations to estimate your payment amount under each plan.
Let Student Loan Planner’s student loan calculator do all the heavy work for you and tell you what your estimated monthly payment would be under each IDR plan.
You can also use the federal government’s repayment estimator.
How to find out if you’re eligible for income-driven repayment
While it may seem obvious, it should be made clear that only federal student loans qualify for an IDR plan. Private student loans are not eligible.
Any borrower with eligible federal student loans can use the REPAYE or ICR plans, regardless of income.
But with PAYE and IBR, you won’t be eligible if your monthly payments under these plans would be more than it would be on a 10-year Standard Repayment Plan.
It’s important to note, though, that once you’re accepted for PAYE or IBR, you’re allowed to remain on the plans even if your monthly payment rises to the same amount as it would have been under the 10-year Standard Repayment plan.
This is important for remaining eligible for Public Service Loan Forgiveness (PSLF). Don’t let your loan servicer kick you off of IBR because “you no longer qualify.” Once you’re accepted to PAYE or IBR, you can stay on the plans for the remainder of your loan repayment.
Additional PAYE eligibility requirements
In addition to the income requirements for PAYE, you’ll also need to be a “new borrower.” What does that mean? It means that you meet the following requirements:
- You took out federal student loans after Oct. 1, 2007.
- You didn’t have a federal student loan balance when taking out those loans.
- You received a Direct Loan on or after Oct. 1, 2011.
Most students who attended school in 2007 or later should meet these requirements.
Which income-driven repayment plans are eligible for forgiveness?
There are two main federal loan forgiveness options that are directly related to IDR plans. The first way to receive forgiveness is by completing your entire repayment plan. Once you do, any remaining balance is forgiven.
The second forgiveness option connected with income-driven repayment plans is PSLF. Let’s take a closer look at the details for both.
This is how long you’ll need to make payments on each plan before you’re eligible to have your remaining balance forgiven.
If you’d like to see exactly what your remaining forgivable balance would be under each plan, our calculator can help.
Public Service Loan Forgiveness
All income-driven repayment plans are eligible for PSLF.
Once you’ve made 10 years of qualifying payments under any of these plans, you may qualify for forgiveness under the PSLF program.
How to apply for income-driven repayment
You’ll also need to provide income information. You can use a tax return from the last two years or provide alternative income documentation.
How to recertify your annual income and family size
Once you’re on an IDR plan, you’ll need to recertify your income and family size each year. Here’s what will happen if you don’t recertify by the deadline:
- On REPAYE, you’ll be removed from the plan and be placed on an alternative repayment plan.
- On PAYE, IBR or ICR, your student loan servicer will assume you have a family size of one and will change your monthly payment to whatever it would be on the 10-year Standard Repayment Plan.
- Under REPAYE, PAYE and IBR, any unpaid interest will capitalize (be added to your principal).
Your student loan servicer is required to let you know your recertification deadline date well ahead of time. Once you know this date, don’t sit on it. Recertify as soon as you can at StudentLoans.gov or by using the paper form.
How to decide which income-driven repayment plan to choose
The official answer that the Department of Education gives is that your student loan servicer should be able to tell you which income-driven repayment plan would be best. And if you happen to get the right person on the phone, this could be true.
However, some servicers are better than others, and some servicers have downright terrible reputations. When you’re trying to decide which repayment strategy would be best, getting in-depth help from a Student Loan Planner consultant could be a great decision.
There are lots of variables that need to be considered before deciding which repayment plan would be best (or whether you should even choose an IDR plan at all). But for starters, here are a few questions you’ll want to consider when picking an income-driven student loan repayment plan.
1. Do you expect your income to significantly increase or stay mostly the same?
If you expect your income to rise significantly, you may want to choose a plan like PAYE or IBR, which will cap your monthly payment at whatever you would have paid under the 10-year Standard Repayment Plan.
With REPAYE, on the other hand, your payment will always be 10% of your discretionary income. This means if your income rises significantly, your payment under REPAYE could become higher than you would have paid under the 10-year Standard Repayment Plan.
On the other hand, with PAYE and IBR, your unpaid interest will capitalize if you stop making payments based on income. With REPAYE, the government offers subsidies to pay for a significant portion of this unpaid interest. This could help borrowers avoid excessive interest capitalization.
Again, this can get really confusing. You’ll want to talk to your loan servicer or a Student Loan Planner consultant to get a more detailed answer as to which plan you should pick based on your current income and income-growth expectations.
2. What kind of loans do you have?
The types of loans you have can make a big difference in which plan you should choose. For instance, if you’re a parent who has Parent PLUS Loans, the only income-driven repayment plan you can become eligible for (via a Direct Consolidation Loan) is ICR.
In another example, grad loan borrowers may want to avoid REPAYE. This is because REPAYE makes borrowers with grad loans make an extra five years of payments (25 years instead of 20) before they’re eligible for forgiveness.
3. Are you single or married?
Are you married, or do you have plans to be married soon? If so, you may want to stay away from the REPAYE plan, as it will count your spouse’s income when calculating monthly payments.
With other plans, you can use your individual income as long as you and your spouse file your taxes separately.
Is choosing an income-driven repayment plan the right decision?
Everyone’s situation is different. There is no one-size-fits-all answer to the question of whether or not you should choose an IDR plan.
The fact of the matter is that you’ll most likely pay more in total over the life of your student loans by choosing an income-driven plan. But, in the meantime, your cash flow situation could be significantly better, which is a big deal. Also, if you want to earn PSLF, you’ll need to be on an income-driven plan.
On the other hand, if you can handle your monthly payments under the 10-year Standard Repayment Plan and you aren’t working toward PSLF, you may be better off refinancing your student loans for a lower rate.