Income Driven Repayment Plan for Student Loans: How They Work

As a recent graduate, you’ve got a lot on your plate: building a career, living on your own, figuring out what you want to do with the expensive education you’ve just completed – and managing your student loan debt.

The good news? If you’re like more than 40 million other Americans, your student loan debt is owned by the U.S. government. And in this case, there is an option for you to pay less each month based on your household income. Unfortunately, if you have any private student loans, this payment plan isn’t available.

What Is an Income-Driven Repayment Plan: Pay As You Earn Instead Of Pay What You Owe

An income-driven repayment plan for federal student loans lets you tie your student loan payments to your income. So, instead of making monthly loan payments based on what you owe, you make payments based on what you earn.

How is this different from a standard repayment plan?

For federal student loans, the standard repayment plan is 10 years (120 months). You pay the same amount each month and the interest is folded into your monthly payments.

Because an income-driven repayment plan is based on your earnings rather than the amount owed, the amount you pay each month is generally lower because it isn’t affected by your interest rate or the amount you owe.

This can be especially helpful for young adults with high levels of debt and lower incomes.

On the other hand, your loan is spread out over a period of 20 – 25 years and your payments will change from year to year as your income rises or falls. It’s important to note that you will end up paying longer than you would on the standard repayment plan.

Which loans are eligible?

Income-driven repayment plans are only available for federal student loans, but not all loan types are eligible.^[1]

Eligible:

• Direct subsidized and unsubsidized (Stafford) loans: These standard federal student loans are held by most borrowers today
• Direct Grad PLUS loans: Loans specifically designated for students pursuing graduate and professional degrees
• Consolidation loans: If you had Perkins loans (which were discontinued in 2018), Federal Family Education (FFEL) loans (discontinued in 2010) or any other discontinued loans, you can consolidate these loans with other federal loans to qualify for income-driven repayment 

Not Eligible:

• Loans in default: To qualify for income-driven repayment your loans must be in good standing
• Parent PLUS loans: If your parents took out loans on your behalf, they aren’t eligible for income-driven repayment because the repayment schedule is based on your income, not your parent’s. You may be eligible for income-contingent repayment, but only under circumstances

How low does my income need to be to qualify?

Not as low as you think. You can actually qualify with a household income of up to $70,000.

And here’s why: Your payments are based on discretionary income, not your gross income.

Your discretionary income equals your adjusted gross income (AGI) minus either 100% or 150% of the U.S. poverty guideline.

In 2021, the poverty guideline in the contiguous 48 U.S. states and the District of Columbia is $12,880 for an individual. That number goes up based on the number of people in your family or household.^[2]

People in your family/household	Poverty Guideline	Multiple (150%) for current income-driven programs
1	$12,880	$19,320
2	$17,420	$26,130
3	$21,960	$32,940
4	$26,500	$39,750
5	$31,040	$46,560

If you’re single, have an adjusted gross income of $40,000, and you sign up for one of the income-driven plans, your discretionary income would be $20,680.

If you’re married or supporting another person, like a child or parent, your discretionary income would be $13,870.

What Are the Current Income-Driven Repayment Plans: Know the Big 4 Plans

Now that we know the terms, let’s look at the four main income-driven repayment programs for federal student loans.

• Revised Pay As You Earn (REPAYE)
• Pay As You Earn (PAYE)
• Income-Based Repayment (IBR)
• Income-Contingent Repayment (ICR)

The programs all work in the same way. Under all four plans, the balance of your loans will be forgiven if your federal student loans aren’t fully repaid at the end of their repayment periods.

The key differences are determined by the type of eligible federal student loans you currently hold and when your loans were taken out.

	Percentage of discretionary income	Eligible loans	Loan forgiven after
Revised Pay As You Earn (REPAYE)	10%	Direct loans	20 – 25 years
Pay As You Earn (PAYE)	10%  Never more than the standard 10-year repayment plan amount	Direct loans (and took out all your student loans after 10/1/17)	20 years
Income-Based Repayment (IBR)	10% if you took out your loans before 7/14/2014 15% if you took out your loans after 7/14/2014 Never more than the standard 10-year repayment plan amount	Direct loans and FFEL program loans	No more than 25 years
Income-Contingent Repayment (ICR)	20% Never more than the standard 12-year repayment plan amount	Parent PLUS loans (only when consolidated into a direct consolidation loan)	25 years

How Are Monthly Payments Calculated: Discretionary Math

Here is the formula to calculate the monthly payments on your income-driven repayment plan:

Monthly repayments = Discretionary income x Plan payment percentage / 12

Let’s say you’re single and owe $36,000 in student loans and are eligible for the REPAYE plan.

• Discretionary income: $36,000 – $19,320 = $16,680
• Monthly payment: $16,680 x 10% / 12 = $139 month

If you were to pay the same loan using the standard repayment plan at 3% interest, you would be paying $348 a month.

In this scenario, REPAYE saves you over $200 each month. We don’t know about you, but for us, that hits different.

Is Income-Driven Repayment Right for You: Consider The Long-Term

If you’re struggling with student loan debt and you qualify for one of these programs, an income-driven repayment plan can help you:

• Save money for the future
• Improve your ability to get approved for a mortgage
• Pay less without affecting your credit score
• Be eligible for debt forgiveness after 20 – 25 years
• Have your debt forgiven in 10 years or less if you qualify for a loan forgiveness program based on your public service

Income-driven repayment plans are usually best suited for student loan borrowers who:

• Work in public-service jobs
• Have experienced extended periods of unemployment or anticipate long-term financial hardships
• Don’t anticipate long-term career and income growth

However, there are challenges:

• You’ll need to reapply every year
• A longer payment period could mean that you’ll still be paying off your student loan debt when your kids are ready for college
• Interest rates stay the same even if your monthly payments are capped (so the interest you owe continues to build)
• You may wind up paying more in interest over the long-term
• Depending on the plan you choose and the amount you pay each month, you may end up with a hefty tax bill

How Do I Apply for Income-Driven Repayment: It’s Easier Than You Think

You can apply for all of the available income-driven repayment programs at the Federal Student Aid website. You’ll need to answer questions about:

• Your employment: If you work for a nonprofit or government organization, you may be eligible for specific programs
• Family size: The larger your family, the lower your payments
• Marital status: Your spouse’s income may affect your eligibility
• Income information: Instead of uploading supporting documentation, like tax returns and pay stubs, you can save some time by transferring your tax returns directly from the IRS website into your application

There’s no application fee. The entire process takes about 10 minutes or less, but it must be completed in one session.

Once you’ve applied and have been approved, you’ll need to return to the same website each year to update your application and let the government know how much you’re earning. If your income goes up, your payments will also go up.

What If I’m Not Eligible: What To Do If Income-Driven Repayment Isn’t Right for You

If an income-driven repayment plan isn’t the right choice for you, there are other ways to lower your student loan payments:

• Refinance to get a lower interest rate
• Consolidate your loans or restructure your debt
• See if deferment or forbearance is right for you
• See if you qualify for other student loan forgiveness programs

Will these programs change?

Because of rising education costs, the way Americans are dealing with student loan debt has become a subject of much debate and may be subject to change. Talk to your student loan service provider about available options and check in with the Federal Student Aid website. You may find new opportunities and programs that may lower your student loan debt – or have it forgiven entirely.