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Is the Income-Based Repayment Plan Right for Your Student Loans?
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Income-Based Repayment is a type of income-driven repayment (IDR) plan that can lower your monthly student loan payments. If your payments are unaffordable due to a high student loan balance compared to your current income, an Income-Based Repayment (IBR) plan can provide much-needed relief.
But before signing on the dotted line, you’ll want to understand IDR plans and how they can affect your finances and student debt. This guide to IBR will demystify this option and help you figure out if it’s right for you. To do so, we’ll answer these questions:
The term “Income-Based Repayment” is often misused as a catch-all for the various IDR programs available today.
But Income-Based Repayment is just one of the four IDR plans offered by the Department of Education. And like other IDR plans, IBR can assist students who can’t afford their monthly federal student loan payments under the standard repayment plan.
Since income-based student loan repayment falls under IDR plans, let’s first take a look at what these options have in common.
How IDR plans lower your monthly costs
The 10-year standard repayment schedule is the default for federal student loan borrowers, but it’s not always affordable.
High student loan balances will mean high monthly payments, which can be challenging to keep up with. Lower incomes relative to debt can also make it a struggle to cover monthly payments under the standard repayment plan.
In such situations, IDR plans can be just the break you need. Instead of setting payments according to your balance, the amount due each month is tied to your income. According to Federal Student Aid, such a plan is intended to make your payments affordable while taking income and family size into account.
Specifically, IDR plans set payments at a percentage of your discretionary income. For example, IBR sets payments at 10% to 15% of your discretionary monthly income, depending on when your loans were disbursed.
Your discretionary income is calculated by finding the difference between your adjusted gross income and 150% of the annual poverty line for a family of your size and in your state. This means your student loan payments under IDR plans are individualized to match your…
- Costs of living
- Family size
Enrolling in Income-Based Repayment or other IDR plans
Only federal student loans are eligible for IDR plans — not private student loans. The types of federal student loans you have might also determine the IDR plans in which you’re eligible to enroll.
Additionally, you’ll need to apply and get approved for an IDR plan before you can access these lower payments. To enroll in Income-Based Repayment or another IDR plan, contact your student loan servicer or request an IDR plan via StudentAid.gov. Your servicer can direct you through its specific process of switching your loans over to an IDR plan.
Since your income is central to how your payments are set, you’ll also need to certify your income upon initially enrolling in an IDR plan. Your payments are reevaluated and recalculated each year, so you’ll need to recertify your income annually to stay on the plan.
You can also recertify your income at will should your income suddenly change, such as after a job loss.
For new borrowers on or after July 1, 2014, IBR caps payments at 10% of your discretionary income. These borrowers will also receive forgiveness after 20 years of repayment.
For borrowers who were issued their first loans before July 1, 2014, IBR limits payments to 15% of discretionary income. These borrowers will be eligible for loan forgiveness after 25 years of repayment.
To qualify, your monthly student loan payments under the IBR plan can’t equal or exceed what your payments would be under the 10-year standard repayment plan.
Federal student loans eligible for IBR include:
- Direct subsidized and unsubsidized loans
- Direct graduate PLUS loans
- FFEL consolidation loans
- Direct consolidation loans
Federal student loans not eligible for IBR:
- Parent PLUS loans
- Any other type of federal loan made to parents
- Direct consolidation loans that repaid loans made to parents
- Private student loans
Student loan borrowers with FFEL Program loans should note that the Income-Based Repayment plan is the only IDR option for which these loans are eligible.
Pay As You Earn (PAYE)
Pay As You Earn (PAYE) was introduced in 2012 to help borrowers better manage their student loan debt payments.
Your prospective monthly payments must be smaller than your standard payments to qualify for the PAYE plan, which is calculated at 10% of your discretionary income. The PAYE plan offers student loan forgiveness after 20 years of repayment.
To qualify for PAYE, there are specific requirements you must meet:
- You must not have taken out a federal student loan before Oct. 1, 2007.
- You must prove that you need assistance in repaying your student loans and have received disbursement of a direct loan after Oct. 1, 2011.
Revised Pay As You Earn (REPAYE)
The Revised Pay As You Earn (REPAYE) Plan was introduced in December 2015 and is the newest option for income-driven repayment plans. Direct loans, Stafford loans, and graduate PLUS loans are eligible for REPAYE, as well as other non-parent federal student loans that are consolidated into direct loans.
Monthly payments are capped at 10% of your discretionary income. But there’s no cap on monthly payments.
Additionally, REPAYE offers student loan forgiveness after 20 years for loans originated for undergraduate studies, and 25 years for loans taken out for graduate studies.
REPAYE also includes a student loan interest subsidy that can be a huge benefit for borrowers with monthly payments that don’t cover interest charges. If they are on REPAYE, 100% of unpaid interest each month is paid for on subsidized loans. And 50% of unpaid interest is subsidized for unsubsidized student loans.
See this government information sheet for more.
If you’ve applied for the other plans but were rejected, the Income-Contingent Repayment (ICR) plan may be your next best option for reducing your monthly student loan payment. It’s the only IDR plan for which parent PLUS loans are eligible — though you will have to consolidate these loans first.
Monthly payments are set as the lesser of either 20% of your discretionary income, or monthly payments when the loan is amortized over 12 years.
ICR also offers student loan forgiveness after 25 years.
There are some major benefits to enrolling in an IDR plan. But Income-Based Repayment and other IDR plans have some potential drawbacks as well.
Here are the central pros and cons you should be aware of as you consider enrolling in an IDR plan.
Pros of income-driven repayment plans
- Monthly payments are more manageable: All income-driven repayment plans for federal student loans can lower your monthly payments if you have low income compared with your student loan balance.
- Adjust payments when your income or family size changes: If your hours are cut or you welcome a new baby to the family, you can recertify your IDR plan. Monthly payments will be recalculated according to changes in your income and family circumstances. They can be as low as $0 if your financial situation warrants it.
- You can get student loan forgiveness: Depending on when you first borrowed and the IDR plan you choose, you can become eligible for student loan forgiveness after 20 to 25 years of on-time payments. And through at least 2025, forgiven amounts won’t be subject to federal income tax, thanks to COVID-19-era legislation.
- Take advantage of Public Service Loan Forgiveness: If you’re eligible for Public Service Loan Forgiveness, enrolling in Income-Based Repayment or a similar IDR can lower payments and help you maximize the benefits of this program. PSLF grants student loan forgiveness of any remaining balance after just 10 years of qualifying payments. Loans forgiven through PSLF won’t incur a tax bill, as this is not considered taxable income.
Cons of income-driven repayment plans
- Loans take longer to repay: Since you’re paying less each month, it will take longer than the typical 10 years on the standard repayment plan to get out of student debt. IDR plans stretch repayment out over 20 to 25 years.
- You might pay more interest with IDR: Smaller payments are great for your budget — but you could end up spending more over the life of your loan. That’s because you’ll be accruing and paying interest for an additional 10 to 15 years.
- Your student loan balance could grow: If your student loan balance is very high, you might have high monthly interest charges. But under IDR, your monthly payments might not cover your interest. Interest that goes unpaid could be added to your balance and cause it to grow instead of shrink.
- Lots of paperwork: You’ll have to apply for income-based student loan repayment or IDR plans. You’ll also have to recertify your income every 12 months.
- Your choices might be limited: Not all federal student loan borrowers will qualify for or benefit from an IDR. You might be eligible only for certain plans. Other borrowers might have to consolidate federal student loans to become eligible for IDR.
- Your income might be too high to qualify: If 10% of your income is higher than your monthly payment on a standard repayment plan, then you would not benefit from the Income-Based Repayment plan. If you’re married and using IDR, payments might be set according to your combined income. For some income-driven plans, your student loan payment is based on the combined income and loan debt of both you and your spouse. Keep this in mind if you file a separate tax return from your spouse, or if you file one together.
Still trying to decide whether Income-Based Repayment or another IDR plan is right for you? Here are a few things you should keep in mind with your budget and financial situation.
1. Estimate your monthly payment
Before settling on Income-Based Repayment, estimate what your new monthly payment will be.
2. Know the tax implications
Will you be able to pay off your student loans before the repayment term is complete? Or are you expecting to have some debt forgiven after the payment period is up?
If you’re banking on student loan forgiveness, keep in mind that any forgiven debt under an income-driven plan has been taxable historically (besides PSLF). It’s unclear if tax-free forgiveness included in student loan stimulus relief will be around past Jan. 1, 2026.
If you won’t be reaching forgiveness until well past that date, discuss your tax implications with a professional so you know what to expect before applying for Income-Based Repayment.
3. Choose what’s right for you
Remember, Income-Based Repayment or another IDR plan can help you regain control of your finances without putting payments on hold. Take the time to research the best options and estimate your new monthly payment, before selecting a plan that works for you.
Going for the lowest monthly student loan payment is appealing, but don’t let that sway your entire decision. Take into account all the facts and numbers before choosing IBR or a similar repayment plan.
It’s wise to choose a plan that balances your need for affordable payments now with long-term costs and repayment. Before proceeding, read further about choosing the best student loan repayment plan for your situation.