About 30-40% of undergraduate students take out federal student loans each year. Over the years, these loans can start to pile up, making for a hefty monthly payment once repayment starts. If you are in the market for a more affordable repayment plan for your federal student loans, consider an income-driven repayment plan.
In this blog, we’ll dive into what an income-driven repayment plan is, the four different options, and the pros and cons of opting into it.
What Is An Income-Driven Repayment Plan?
An income-driven repayment (IDR) plan is a federal loan repayment option. Unlike the standard repayment plans, IDR bases your monthly payment on your income instead of how much you owe.
How Is Income-Driven Repayment Calculated?
Along with your income, the federal government will look at other factors. They will look at the specific repayment plan you choose, your family size, and your location. If applicable, they’ll also look at your tax status with your spouse and your spouse’s federal student loan debt. The combination of these factors is what determines your payment amount.
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The 4 Income-Driven Repayment Options
There are four different income-driven repayment plans to choose from. Each repayment option has its own terms and requirements to qualify. Here is a quick overview of each one.
Income-Based Repayment (IBR)
Income-Based Repayment is one of the more flexible options. You can get it regardless of when you received your loans, but you will have to demonstrate financial need. The payment amount is 10-15% of your discretionary income. The repayment period is about 20-25 years.
Pay as You Earn (PAYE)
The Pay As You Earn plan is one of the newer IDR plans, coming into effect in 2012. To qualify, you must be a borrower from after October 1, 2007 with a disbursement date on or after October 1, 2011. You must also demonstrate financial need. The payment amount is 10% of your discretionary income. The repayment period is about 20 years.
Revised Pay as You Earn (REPAYE)
The Revised Pay As You Earn plan is the newest plan, coming into effect in 2015. You’re eligible regardless of when you first got the loan, and you don’t have to demonstrate financial need. The REPAYE plan payment amount is 10% of your discretionary income. The repayment term is about 20-25 years.
Income-Contingent Repayment (ICR)
The ICR plan is a good option if you want to lower your monthly payment but don’t qualify for the other IDR plans. For an ICR plan, you don’t have to demonstrate financial need, which makes it easier to qualify for. Additionally, the ICR plan payment amount is either 20% of your discretionary income or what you would pay monthly on a 12-year fixed repayment plan, whichever is lesser. The repayment period is about 25 years.
Pros and Cons of an Income-Driven Repayment Plan
Income-driven repayment plans are great, but they may not be right for everyone. Here are some things to consider when deciding if an income-driven repayment plan is right for you.
Pros
Good if You are Unemployed
An income-driven repayment plan is a good option if you are unemployed. Since the payment is based on your income and financial situation, it will be adjusted to something that you can afford while unemployed. - Lower Monthly Payments
Monthly payments on an IDR plan are much more likely to be lower. In fact, IDR plans offer the lowest monthly payments out of all repayment options. As long as your student debt exceeds your income, you’ll qualify for lower monthly payments.
- Payments Can Be $0
If you are a low-income borrower, you can qualify for a $0 student loan payment. This is done by comparing your income with the poverty line. Generally, if your income is between 100-150% less than the poverty line relative to your location and family size, you will qualify for $0/month payments.
- Remaining Balance is Forgiven
After 20-25 years of repayment on an IDR plan, your remaining student loan balance can be forgiven. There’s even the Public Service Loan Forgiveness (PSLF) program, which, if you qualify, will grant you loan forgiveness after only 10 years.
- Your Credit Score Isn’t Negatively Impacted
IDR plans won’t hurt your credit score. Since the monthly payment amount is based on your financial situation, they’ll be a lot more affordable. This means it’ll be easier to make the monthly payment. And as long as you make the payments, even if it’s $0, your credit score won’t be affected
Cons
You May Not Qualify
There are certain eligibility requirements to access IDR plans. For one, IDR plans are only available for federal student loans. Even then, eligible loans are largely only Direct Loans. If you don’t have a Direct Loan, you may have to consolidate to qualify. Additionally, each individual plan may have its own requirements to qualify.- Your Overall Balance Could Increase
Although a big advantage of an IDR plan is that your payments might decrease, it could cause your overall balance to increase. This is called negative amortization. Negative amortization happens when your monthly loan payment isn’t enough to cover the interest that accrues each month. So, while you may be making monthly payments on an IDR plan, your total loan balance may still increase in the meantime.
- You’ll Have to Pay Taxes on the Forgiven Balance
Unless you qualify for PSLF and choose to do that, your forgiven balance from an IDR plan is taxable. This is because the IRS treats this canceled debt as income. Under law, then, you’ll have to pay taxes on any forgiven balance.
- Payments Can Increase
Generally speaking, if your income increases, your monthly payment will too. Additionally, there is no standard cap for income-driven repayment plan loan payments. This means that there is no limit on how much your monthly payment can be.
- You Need to Recertify Your Income Every Year to Qualify
You will need to recertify your income and family size every year to continue on an IDR plan, which includes filling out annual paperwork. There is also a strict deadline, and if you miss it, you will be placed back in the standard repayment plan.
Income-Driven Repayment FAQs
Will Income Driven Repayment Hurt My Credit Score?
Switching to an income-driven repayment plan won’t directly affect your credit score. But, a lowered monthly payment will lower your debt-to-income ratio. That can be good for your credit. On the other hand, you will get an extended loan term, so you’ll have the debt for longer. You can see these changes on a credit report.
How Long Can You Stay on Income-Driven Repayment?
Right now, the maximum repayment period is 25 years. After 25 years, any remaining loan balance will be forgiven.
How Long Does an Income-Driven Repayment Plan Last?
It depends on the plan that you have. For example, the Income-Contingent Repayment Plan has a repayment period of 25 years. Meanwhile, the Pay As You Earn Plan only has a repayment period of 20 years. Generally, it’ll be anywhere from 20-25 years.
Can I Make Extra Payments on an Income-Driven Repayment Plan?
Yes, you can make extra payments. Making an extra payment won’t lower your monthly payment. But, it will save some interest and help you to pay off your loans sooner.
Why Did My IDR Payment Go Up?
Because your IDR payment is based on your income, the payment may increase as your income does. Each year, you have to recertify your income in order to continue to qualify. So, if you got a promotion, a new job, or took on a second job and your income increased, then so will your payment.
Student loan rates from our partners
Ascent
Ascent’s undergraduate and graduate student loans are funded by Bank of Lake Mills, or DR Bank, each Member FDIC. Loan products may not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions may apply. For Ascent Terms and Conditions please visit: www.AscentFunding.com/Ts&Cs. Rates are effective as of 12/1/2024 and reflect an automatic payment discount of either 0.25% (for credit-based loans) OR 1.00% (for undergraduate outcomes-based loans). Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized bank account each month. For Ascent rates and repayment examples please visit: AscentFunding.com/Rates. 1% Cash Back Graduation Reward subject to terms and conditions. Cosigned Credit-Based Loan student must meet certain minimum credit criteria. The minimum score required is subject to change and may depend on the credit score of your cosigner. Lowest rates require full
principal and interest payments, the shortest loan term, a cosigner, and are only available for our most creditworthy applicants and cosigners with the highest average credit scores. Actual APR offered may be higher or lower than the repayment examples above, based on the amount of time you spend in school and any grace period you have before repayment begins.
Ascent’s undergraduate and graduate student loans are funded by Bank of Lake Mills, or DR Bank, each Member FDIC. Loan products may not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions may apply. For Ascent Terms and Conditions please visit: www.AscentFunding.com/Ts&Cs. Rates are effective as of 12/1/2024 and reflect an automatic payment discount of either 0.25% (for credit-based loans) OR 1.00% (for undergraduate outcomes-based loans). Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized bank account each month. For Ascent rates and repayment examples please visit: AscentFunding.com/Rates. 1% Cash Back Graduation Reward subject to terms and conditions. Cosigned Credit-Based Loan student must meet certain minimum credit criteria. The minimum score required is subject to change and may depend on the credit score of your cosigner. Lowest rates require full
principal and interest payments, the shortest loan term, a cosigner, and are only available for our most creditworthy applicants and cosigners with the highest average credit scores. Actual APR offered may be higher or lower than the repayment examples above, based on the amount of time you spend in school and any grace period you have before repayment begins.
LendKey
1 – Terms and Conditions Apply
Loan products, terms, and benefits may be modified or discontinued by participating lenders at any time without notice. Rates displayed are reserved for the most creditworthy consumers who enroll to make automatic monthly payments. Your initial rate will be determined after a review of your application and credit profile. Variable rates may increase after consummation. You must be either a U.S. citizen or Permanent Resident in an eligible state and from an eligible school, and meet the lender’s credit and income requirements to qualify for a loan. Certain membership requirements (including the opening of a share account, a minimum share account deposit, and the payment of any applicable association fees in connection with membership) may apply in the event that an applicant wishes to apply with, and accept a loan offered from, a credit union lender. If you are not a member of the credit union lender, you may apply and become a member during the loan application process if you meet the lender’s eligibility criteria. Applying with a creditworthy cosigner may result in a better chance of loan approval and/or lower interest rate. Loans for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not available via LendKey.com.
2 – Cosigner Release
Some lenders participating on LendKey.com may offer the benefit of cosigner release. Cosigner release is subject to lender approval. In order to qualify, the borrower, alone, must meet the following requirements: (1) Make the required number of consecutive, on-time full principal and interest payments as indicated in the borrower’s credit agreement during the repayment period (excluding interest-only payments) immediately prior to the request. Any period of forbearance will reset the repayment clock; (2) The account cannot be in delinquent status; (3) The borrower must provide proof of income indicating that he/she meets the income requirements and pass a credit review demonstrating that he/she has a satisfactory credit history and the ability to assume full responsibility of loan repayment; (4) No bankruptcies or foreclosures in the last sixty months; and (5) No loan defaults.
3 – Autopay Rate Reduction
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments.
4 – AutoPay Discount & Lowest Interest Rate
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised APR is only available for loan terms of 10 years and is reserved for the highest qualified applicants, taking into consideration the applicant’s credit and other factors.
1 – Terms and Conditions Apply
Loan products, terms, and benefits may be modified or discontinued by participating lenders at any time without notice. Rates displayed are reserved for the most creditworthy consumers who enroll to make automatic monthly payments. Your initial rate will be determined after a review of your application and credit profile. Variable rates may increase after consummation. You must be either a U.S. citizen or Permanent Resident in an eligible state and from an eligible school, and meet the lender’s credit and income requirements to qualify for a loan. Certain membership requirements (including the opening of a share account, a minimum share account deposit, and the payment of any applicable association fees in connection with membership) may apply in the event that an applicant wishes to apply with, and accept a loan offered from, a credit union lender. If you are not a member of the credit union lender, you may apply and become a member during the loan application process if you meet the lender’s eligibility criteria. Applying with a creditworthy cosigner may result in a better chance of loan approval and/or lower interest rate. Loans for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not available via LendKey.com.
2 – Cosigner Release
Some lenders participating on LendKey.com may offer the benefit of cosigner release. Cosigner release is subject to lender approval. In order to qualify, the borrower, alone, must meet the following requirements: (1) Make the required number of consecutive, on-time full principal and interest payments as indicated in the borrower’s credit agreement during the repayment period (excluding interest-only payments) immediately prior to the request. Any period of forbearance will reset the repayment clock; (2) The account cannot be in delinquent status; (3) The borrower must provide proof of income indicating that he/she meets the income requirements and pass a credit review demonstrating that he/she has a satisfactory credit history and the ability to assume full responsibility of loan repayment; (4) No bankruptcies or foreclosures in the last sixty months; and (5) No loan defaults.
3 – Autopay Rate Reduction
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments.
4 – AutoPay Discount & Lowest Interest Rate
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised APR is only available for loan terms of 10 years and is reserved for the highest qualified applicants, taking into consideration the applicant’s credit and other factors.
Earnest
Student Loan Origination (Private Student Loan) Interest Rate Disclosure:
Student Loan Origination (Private Student Loan) Interest Rate Disclosure:
College Ave
College Ave Student Loans products are made available through Firstrust Bank, member FDIC, First Citizens Community Bank, member FDIC, or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
(1) All rates include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. If a payment is returned, you will lose this benefit. Variable rates may increase after consummation.
(2) As certified by your school and less any other financial aid you might receive. Minimum $1,000.
(3) This informational repayment example uses typical loan terms for a freshman borrower who selects the Flat Repayment Option with an 8-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 7.78% fixed Annual Percentage Rate (“APR”): 54 monthly payments of $25 while in school, followed by 96 monthly payments of $176.21 while in the repayment period, for a total amount of payments of $18,266.38. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
Information advertised valid as of 12/2/2024. Variable interest rates may increase after consummation. Approved interest rate will depend on creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of the Flat Repayment Option with the shortest available loan term.
College Ave Student Loans products are made available through Firstrust Bank, member FDIC, First Citizens Community Bank, member FDIC, or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
(1) All rates include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. If a payment is returned, you will lose this benefit. Variable rates may increase after consummation.
(2) As certified by your school and less any other financial aid you might receive. Minimum $1,000.
(3) This informational repayment example uses typical loan terms for a freshman borrower who selects the Flat Repayment Option with an 8-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 7.78% fixed Annual Percentage Rate (“APR”): 54 monthly payments of $25 while in school, followed by 96 monthly payments of $176.21 while in the repayment period, for a total amount of payments of $18,266.38. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
Information advertised valid as of 12/2/2024. Variable interest rates may increase after consummation. Approved interest rate will depend on creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of the Flat Repayment Option with the shortest available loan term.
Final Thoughts from the Nest
IDR plans are a great option if you’re struggling to make loan payments. They adjust to your financial situation, making it a more affordable repayment option. Of course, these plans are only available for your federal student loans. If you have private student loans, talk to your lender about repayment options. Many of our partnering lenders offer a wide variety of payment options. Sign up with Sparrow and fill out the free form to see what you pre-qualify for with any of our 15+ lenders.