All About Income-Driven Repayment Plans
The U.S. federal government offers four income-driven repayment plans (IDR) as alternatives to the standard 10-year repayment plan. The income-driven repayment plans base monthly payments on your annual income. If your monthly student loan payments are too high, one of these plans may help you get a lower amount. Payments can even be as low as $0! Continue reading to learn all about income-driven repayment plans.
Similarities between different income driven repayment plans
Each IDR plan has its own qualifications and limits. However, they all share some similarities.
All four of the IDRs require an application to enroll. This IDR application can be found through the Department of Education. The process takes about 10 minutes.
The application requires certain documentation in order to calculate monthly payments. First, you’ll need to provide a transcript of your most recent income-tax return. If you didn’t file taxes, you can provide documentation in the form of pay stubs, a letter from your employer outlining your income, or a signed letter describing your gross pay. Second, you must provide information about your family size. This information will be used to calculate your monthly payments.
Your loan servicer can place your loans in deferment while your application is being processed. Interest will still accrue during that time.
Another similarity between all of the IDRs is that monthly payments are capped at a portion of annual income. The limit varies between plans, but it is either 10% or 20%.
The amount you pay on an IDR can change year to year. This is because, on each plan, you must recertify your income and family size. This process must be done annually, or there are consequences. The consequences include capitalizing interest and being moved back to the standard 10-year repayment plan.
The recertification process is quick and easy. Just go to the same page as the IDR application and fill out the form again. When filling out the application, indicate that you are recertifying. Your loan servicer will remind you when the deadline is approaching.
All IDRs offer forgiveness of the remaining loan balance after the repayment period. The repayment period is either 20 or 25 years, depending on the plan.
This offer of forgiveness is enticing, especially if you have a large balance. However, you may end up paying off your loan before the repayment period ends. Also, keep in mind that you’ll pay more in interest over time on all of these plans.
The final similarity between all 4 IDR plans is that they cannot be used for defaulted loans. Borrowers must get their loans out of default before enrolling in an IDR.
Qualifications and limits of specific plans
Pay As You Earn (PAYE)
The PAYE plan has monthly payments that are capped at 10% of your annual income. The payment period is 20 years. PAYE can only be used on federal Direct loans.
Under PAYE, monthly payments will never be more than what you would have paid on the standard 10-year plan. If at any point your income increases so that you would pay more than the standard plan, you will remain in PAYE but you will pay based on the 10-year plan.
Therefore, you cannot enroll in PAYE if your monthly payments on the plan would be higher than the 10-year plan. Generally, you can qualify for PAYE if your debt is a significant portion of your annual income. Also, to enroll in PAYE, you must be a new borrower. This means you must have not had an outstanding balance on a Direct or FFEL loan on or after October 1, 2007. You must also have received a disbursement of a Direct loan on or after October 11, 2011.
PAYE may be a good fit if you have graduate/professional school loans or you have low earning potential. Another important thing to note about PAYE is if you’re married, and you and your spouse file taxes jointly, your spouse’s income will be factored into your monthly payments. If you file taxes separately, payments will be based only on your income.
Revised Pay As You Earn (REPAYE)
The REPAYE plan has monthly payments that are capped at 10% of your annual income. The payment period is 20 years if all your loans were used for undergraduate studies. The payment period is 25 years if you took out loans for graduate/professional school. REPAYE can be used on all federal Direct loans. FFEL loans can be paid under this plan if they are consolidated into a Direct consolidation loan first.
Under REPAYE, your monthly payments will always be based on your income and family size, regardless of any changes. If your income increases over time, you may end up paying more monthly than you would have paid on the standard 10-year plan.
REPAYE may be a good fit if you have a high earning potential or if you do not have graduate/professional school loans. REPAYE is also an ideal plan if you are not married. This is because your spouse’s income will be factored in regardless of if you file taxes jointly or separately.
Income-Based Repayment (IBR)
The Income-Based Repayment plan caps monthly payments at 10% of annual income if you are a new borrower on or after July 1, 2014, meaning you had no outstanding loan balance. If you are not a new borrower on or after July 1, 2014, the monthly payment is 15% of annual income. The payment period is 20 years for new borrowers, or 25 years for those who are not new borrowers. IBR is different from PAYE and REPAYE because it can be used to pay FFEL loans as well as Direct loans.
Like PAYE, you can only enroll in IBR if your monthly payments would be less than what you would have paid on the standard 10-year plan. If your income increases to the point that monthly payments would be more than the standard plan, you will remain in IBR, but pay based on the 10-year plan.
IBR is a good fit if you don’t qualify for PAYE or have FFEL loans.
Income-Contingent Repayment (ICR)
On the Income-Contingent Repayment plan, monthly payments are the lesser of 20% of annual income or what you would pay on a 12-year plan with a fixed payment that is adjusted according to income. ICR has a 25-year payment period.
This plan can be used on all Direct student loans. It is also the only plan that allows you to pay parent PLUS loans. The parent PLUS loans must first be consolidated into a Direct consolidation loan.
Payments under ICR are always based on income and family size. So, there is a chance that you could pay more monthly under this plan than the standard plan. This plan is ideal if you are a parent looking to pay off PLUS loans.
Income-driven repayment plans are a great way to lower your monthly student loan payments and avoid issues such as default. The 4 IDRs have such nuanced requirements that it can be challenging to make a decision. The easiest way to select an IDR that’s best for you is by talking to your loan servicer. They can give advice on which plan would be the best fit for your income and loan balance.
Related: How to lower student loan payments