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College |  August 17, 2023  |  Lisa Litant

Are income-driven repayment plans right for you?

When it comes to federal student loans, choosing how to repay them can make a big difference in your financial life after college. Switching to an income-driven repayment plan (IDR) could make your student loan payments more manageable. Here are some tips on how to decide if one of these plans is right—and which one might be the best—for you.

What is an income-driven repayment plan?

An income-driven repayment plan (also known as an income-related plan) is an option for making your federal student loan payments more affordable, relative to how much money you’re earning in your job.

Note: Income driven repayment plans refer to federal student loans only; private student loans generally do not offer this option.

4 Types of federal income-driven repayment plans

The Department of Education offers four types of income-driven repayment plans for federal student loans. Note: Discretionary income is the difference between your annual income and 150% of the poverty guideline for your family size and state of residence, as per studentaid.gov.

Here’s a brief summary of the plans along with how long the repayment period is for each:^{footnote 1}

• SAVE Plan (replaces Revised Pay As You Earn (REPAYE) Plan): This new program from the Department of Education stands for “Saving on a Valuable Education.” If you’re currently enrolled in REPAYE, you’ll be automatically enrolled in SAVE, which is a more affordable plan. 
  • Payments: For your monthly payment, SAVE considers your income and family size. This plan can decrease your monthly payment amount, plus it expands the eligibility for saving money every year.
  • Eligible loans: Any direct subsidized or unsubsidized loan, direct PLUS loan made to grad students, and direct consolidation loans that don’t include loans made to parents will be eligible.
• Pay As You Earn Plan (PAYE) Plan: Generally, 10% of your discretionary income, but never more than the 10-year Standard Repayment Plan amount
  • Repayment period: 20 years
  • Eligible loans: Any direct subsidized or unsubsidized loan, direct PLUS loan made to students, and direct consolidation loans that don’t include loans made to parents
  • Eligibility: You must be a new borrower; that means no outstanding balance on a Direct Loan or Federal Family Education Loan (FFEL) Program loan on or after Oct. 1, 2007; and you must have received a disbursement on or after Oct. 1, 2011
  • Loan forgiveness: Any outstanding balance will be forgiven if your loan’s not paid in full after 20 years
• Income-Based Repayment (IBR) Plan: Generally, 10% - 15% of your discretionary income, but never more than the 10-year Standard Repayment Plan amount
  • Repayment period: 20 or 25 years
  • Eligible loans: Any direct subsidized or unsubsidized loan, direct PLUS loan made to students, and direct consolidation loans that don’t include loans made to parents
  • Eligibility: Direct loan and FFEL program borrowers who would pay less than they would under the 10-year standard plan
  • Loan forgiveness: Any outstanding balance will be forgiven if your loan’s not paid in full after 20 or 25 years
• Income-Contingent Repayment (ICR) Plan: Either 20% of your discretionary income or what you’d pay with a repayment plan that has a fixed payment for 12 years (adjusted to your income)—whichever is less
  • Repayment period: 25 years
  • Eligible loans: Any direct subsidized or unsubsidized loan, direct PLUS loan made to students, and direct consolidation loans that don’t include loans made to parents
  • Eligibility: Any borrower with eligible federal student loans
  • Loan forgiveness: Any outstanding balance will be forgiven if your loan’s not paid in full after 25 years

Pros of income-driven repayment plans

• Lower monthly payments: Your payment will be limited to a set percentage (from 10% - 25%) of your income.
• Loan forgiveness: If you haven’t paid your balance by the specified time for each loan, it will be forgiven (you won’t have to pay what’s left).
• Extra cash: Since your repayment plan is tied to your income and family size, a lower payment means you could have more money each month for living expenses than you would without the program.
• Protection from default: If you run the risk of not being able to make your current payments, moving to an income-driven plan could help you avoid default (which would have a negative impact on your credit).

Cons of income-driven repayment plans

• Longer repayment: There could be a longer repayment period than for a standard plan (except for income-based repayment).
• Higher cost: You could end up paying more for your loan overall because interest will continue to accrue (grow) for a longer period of time.
• Credit impact: Being in an income-driven repayment plan won’t affect your credit score, but since you’re repaying the loan for a longer time, there could be an impact when you apply for new credit cards.
• Recertification: You need to recertify your income and family size every year; your payment can go up or down if your situation has changed.
• Possible tax impact: You may need to pay income tax on any amount that’s forgiven.
• Default: If your loans are in default, they’re not eligible for income-driven repayment plans.

Qualifying for an income-driven repayment plan

To figure out whether you’re eligible and what an income-driven repayment plan could mean to your monthly payments, you can use the Department of Education’s loan simulator. Then contact your loans’ servicer to discuss what’s best for your specific situation.

If you’re enrolled in an income-driven plan, you can switch to another one. There’s a single application to fill out whether you’re applying for the first time, changing plans, or recertifying your personal info. You’ll need to indicate your family size, whether you’re in deferment or forbearance, which plan you want, and what your current income is.

Is an income-driven repayment plan right for you?

With federal student loan payments starting up again, this is a good time to look at your repayment plan. If you’re struggling to pay your bills—including your federal student loan bills—on a salary that might not be enough for your expenses, income-driven repayment (IDR) plans can help. The official Federal Student Aid repayment site is the source for what’s available for your specific situation. And your loan servicer can also guide you to the solution that’s best for you.