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Ultimate Guide to Income-Driven Repayment Plans for Your Student Loans 

income driven repayment plan

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If you’re struggling to keep up with student loan payments, you might be able to lower them with an income-driven repayment plan. Federal Student Aid offers four main income-driven repayment plans for federal student loans (private student loans aren’t eligible). Read on to learn how these plans work, what it takes to apply, and how to choose the right plan for you.

Income-driven repayment plans for your student loans

Income-driven repayment plans adjust payments on your federal student loans if you’re having trouble affording the standard monthly payment. They also extend your loan terms to 20 or 25 years.

If you still have a balance at the end of your term, it will be forgiven. But the forgiven amount will likely be counted as taxable income, so you might have to pay one last bill on your student loans before you’re debt-free.

Here are the four main income-driven repayment plans:

1. Income-Based Repayment

The Income-Based Repayment (IBR) adjusts your monthly payments to 10% or 15% of your discretionary income, depending on when you borrowed your loans. Here are its main features:

  • Reduces student loan payments to 10% of your discretionary income and extends payment terms to 20 years if you borrowed after July 1, 2014
  • Reduces student loan payments to 15% of your discretionary income and extends payment terms to 25 years if you borrowed before July 1, 2014

Note that discretionary income refers to the difference between your adjusted gross income and 150% of the federal poverty guideline for your state and family size.

Pretty much all federal student loans are eligible for IBR except for parent loans. These loans are eligible:

  • Direct subsidized and unsubsidized loans
  • PLUS loans made to grad students
  • Consolidation loans that don’t contain any parent loans
  • FFEL loans (except for ones made to parents)
  • Perkins loans, if consolidated

To qualify for IBR, you need to show financial need. Basically, you need to show that your payments on IBR would be less than they would be on the standard 10-year plan.

2. Pay As You Earn

The Pay As You Earn (PAYE) plan is available to individuals who borrowed after Oct. 1, 2007 and received a Direct loan on or after Oct. 1, 2011.

To qualify for this plan, you must show that your payments would be less on PAYE than they would on the standard 10-year plan.

Here’s how it works:

  • Adjusts payments to 10% of your discretionary income
  • Extends repayment terms to 20 years

Similar to IBR, most federal loans are eligible except for those made to parents. These include,

  • Direct subsidized and unsubsidized loans
  • PLUS loans made to graduate students
  • Consolidation loans, except for those that include parent loans
  • FFEL consolidation loans, except for those that include parent loans
  • Perkins loans, if consolidated

3. Revised Pay As You Earn

Revised Pay As You Earn (REPAYE) is a little more flexible than IBR or PAYE, since you don’t need to demonstrate financial need to get on it and it doesn’t matter when you borrowed.

The REPAYE plan,

  • Adjusts your payment to 10% of your discretionary income
  • Extends your repayment term to 20 years for undergraduate loans and 25 years for graduate loans

Eligible loans include,

  • Direct subsidized and unsubsidized loans
  • Direct PLUS loans made to grad students
  • Direct consolidation loans, except for those containing parent loans
  • FFEL consolidation loans, except those containing FFEL parent loans
  • Perkins loans, if consolidated

One potential con of REPAYE is that your spouse’s income is included when determining your monthly payment, even if you file separately. Because of this, your payment might not be as low as it would be on another plan.

4. Income-Contingent Repayment

Income-Contingent Repayment (ICR) is the only plan available for parent loans, but you have to consolidate them first. It doesn’t have an income requirement.

  • Adjusts your monthly payments to 20% of your discretionary income or the amount you’d pay on a fixed 12-year plan, whichever is lower
  • Extends your repayment terms to 25 years

Pretty much all loans are eligible, but if you want to include parent PLUS loans, FFEL PLUS loans, or Perkins loans, you have to consolidate them first.

Choosing the right income-driven repayment plan for you

So, which income-driven repayment plan is right for you? Well, if your goal is to lower your payment as much as possible, choose the plan that will lower your payment the most.

If you’re a new borrower, that plan might be IBR. If you borrowed prior to July 1, 2014, PAYE or REPAYE might be the better option. And if you’re a parent borrower, your only option is ICR.

Check out the details of each plan, and figure out which one would lower your payment the most and lead to loan forgiveness sooner (i.e., after 20 years instead of 25).

Your loan servicer should be able to crunch the numbers for you to help you decide.

Where to find income-driven repayment plan forms

You can apply for an income-driven repayment plan online by filling out the Income-Driven Repayment Plan Request Form found here.

If you have any questions, reach out to your loan servicer for guidance before you apply. It’s also a good idea to do your own research, since loan servicers aren’t always as helpful as you’d like them to be.

Make sure to re-certify your annual income and family size

Along with selecting your plan, you’ll likely have to provide information on your adjusted gross income. You can use the IRS data retrieval tool to import last year’s tax information. If you didn’t file your taxes, you might be able to provide other documentation, such as pay stubs.

You’ll also need to re-certify your income and family size. Note that there are no fees to apply for income-driven repayment. If someone is trying to charge you a fee, they are asking for money for something you can do for free or worse, trying to scam you.

Be cautious about income-driven repayment plans for student loans

While income-driven repayment plans can be a godsend if you’re having trouble making payments, they also have some downsides. IDR plans will keep you in debt for a lot longer, which means you’ll pay way more interest over the life of your loan.

If you can afford the standard 10-year plan, you could lower your overall costs of borrowing. And if you can swing extra payments, you’ll cut down on interest even more.

Another downside is that income-driven repayment plans aren’t available for private student loans. Some private lenders will let you skip a payment or postpone payments if you’ve run into financial hardship.

But you probably won’t have an income-driven option, so it will be tough to lower payments unless you’re able to refinance and choose a longer repayment term of 15 or 20 years.

If there’s one takeaway here, it’s that you’ve got options when it comes to paying back your student loans. If you need some relief on payments, explore alternatives to the standard plan to find an arrangement that works for your budget.

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