Income-Driven Repayment (IDR) plans give federal student loan borrowers monthly payments based on income, debt, and family size. Most of the time this can drastically reduce the payment for the borrower. In some cases, the monthly payment is zero or more than the standard repayment amount. If your student loan payments are affecting your ability to pay for food, rent, or other bills, an income-driven repayment plan may be the best option for you.
The Four Types of Income-Driven Repayment Plans
There are four types of income-driven repayment plans, and the one you choose will depend upon the type of federal student loans borrowed. Each payment plan calculates your payment according to your discretionary income. When you apply for an IDR, you’ll be required to choose one of the four IDR plans below.
Direct and FFEL Loan Borrowers: Income-Based Repayment (IBR)
The IBR plan monthly payment amount is equal to 10% of your discretionary income (15% if you borrowed before July 1, 2014). The total amount is divided by 12 to determine your monthly payment. IBR is the most flexible and beneficial plan for students who seek repayment based on need. If you demonstrate through hardship that other expenses (including private student loan payments) further reduce your discretionary income, your payment can be as little as zero.
Direct and FFEL Program Loans are eligible for IBR. Parent PLUS Loans and consolidated loans that included a Parent PLUS Loan do not qualify for this program.
Consolidated (Parent PLUS Loans: Income-Contingent Repayment (ICR)
The Income-Contingent Repayment (ICR) Plan offers monthly payments that are the lesser of the standard repayment option or 20% of discretionary income. The standard repayment option is based on a 12-year schedule, and the reduced payment plan would be calculated based on 20% of your current discretionary income, divided by 12.
Although Parent PLUS Loans are not eligible to be paid under any of the four income-driven repayment plans, parent borrowers are available for the ICR plan by consolidating existing Federal or Direct PLUS Loans into a Direct Consolidated Loan.
Direct Loans: Pay As You Earn Repayment Plan (PAYE)
The Pay As You Earn (PAYE) Repayment Plan is a repayment plan that offers monthly payments based on your earnings, family size, and other federal student loan obligations. The program is designed to account for career growth and life stages. The monthly payments are 10% of discretionary income divided over 12 months.
The PAYE Repayment Plan is only available to new borrowers defined as 1) having no outstanding balance on a Direct or FFEL Loan when receiving loan disbursement on or after Oct 1, 2007, and 2) received at least one disbursement on or after Oct 1, 2011.
Direct Loans: Revised Pay As You Earn Repayment Plan
The Revised Pay As You Earn (REPAYE) Plan requires monthly payments of 10% of your discretionary income over 12 months. Like the PAYE Plan, the amounts are calculated based on family size, earnings, and other eligible federal student loan payments.
Unlike the PAYE plan, the REPAYE plan is not open to Parent PLUS borrowers or consolidated Direct Loans that contain PLUS or FFEL program loans.
What is “discretionary income?”
Discretionary income is defined as the following:
For IBR, PAYE, and REPAYE plans: 150% of the poverty guideline for your family size and state, subtracted from your annual income.
For the ICR plan: the poverty guideline amount deducted from your yearly income.
For example, in 2018 a household of one has a poverty guideline of $12,140. One hundred fifty percent of that number is $18,210. If you are a single-person household and earn $40,000, your discretionary income for IBR, PAYE, and REPAYE would be calculated as $40,000 - $18,201, or $21,790.
The Disadvantages of Income-Driven Repayment Plans
Though reducing your loan payment may seem to be an all-around positive, there are disadvantages to long-term Income-Driven Repayment Plans. First, a typical standard repayment plan is repaid over 10 years, while IDR plans are typically paid over 20 years for undergraduates and 25 years for graduate students. Interest accrues throughout the life of the loan, and borrowers who choose an IDR plan will ultimately pay more interest over the life of the loan than most borrowers under the standard plan.
Another controversial benefit to IDR plans is loan forgiveness. Typically after repaying the loan over 20-25 years, the remaining balance is forgiven but also converted to taxable income. Not only are you required to report the forgiven debt as taxable income, but the balance could also amount to tens of thousands of dollars in taxes due to the IRS. Before enrolling in an IDR plan, consider the repercussions of loan forgiveness. For this reason, IDR plans are only recommended in cases of genuine need.
Private Student Loans and Income-driven Repayment Plans
In the case of private student loans, lenders are not required to provide income-driven repayment plans. Most private lenders do offer hardship programs that may include reduced payments. Before securing a private loan, ask the prospective lender about programs or payment plans in the event of a hardship.
Student Loan RepaymentThe best option for graduates and student loan borrowers is to pay student loan balances as quickly as possible. Not only will you gain the piece of mind of being debt free, but you’ll also save hundreds and potentially thousands of dollars on student loan interest. Income-Driven Repayment plans are available should you encounter hardship or are a recent graduate expecting to increase your salary over time.
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