Income-Based Repayment: How It Works and Whom It’s Best For

Income-Based Repayment has different features depending on when you borrowed federal student loans.
Ryan Lane
By Ryan Lane 
Edited by Karen Gaudette Brewer

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Student loan borrowers often use the term “income-based repayment” to describe income-driven repayment plans that can lower monthly bills based on income and family size. But Income-Based Repayment (IBR) is actually one of four such plans known collectively as income-driven repayment (IDR) plans. IBR is potentially the most complicated of the bunch.

Income-Based Repayment is unique because its features change depending on whether you took out your loans before July 1, 2014, or from that date on. Borrowing before that date will qualify you for Old IBR, which caps payments at 15% of your discretionary income and forgives your loans after 25 years of payments. New IBR improves on those numbers, shrinking them to 10% and 20 years, respectively.

Old IBR at a glance:

• Repayment length: 25 years.

• Payment amounts: 15% of your discretionary income.

• Other qualifications: Must have federal student loans.

• Best for: Borrowers with FFELP loans.

New IBR at a glance:

• Repayment length: 20 years.

• Payment amounts: 10% of your discretionary income.

• Other qualifications: Must have federal direct loans.

• Best for: Borrowers who don't qualify for Pay As You Earn (PAYE).

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Is IBR right for you?

If you qualify for New IBR — meaning you took out loans on or after July 1, 2014 — this plan is usually the best income-driven option for you in the following instances:

  • You don’t also qualify for PAYE.

  • You don’t expect your income to increase much over time.

  • You have grad school debt.

  • You’re married, and you and your spouse both have incomes.

IBR vs. other income-driven plans

All income-driven plans share some similarities: Each caps payments at between 10% and 20% of your discretionary income and forgives your remaining loan balance after 20 or 25 years of payments. In July 2024, those figures will shift as the full changes of the Saving on a Valuable Education or SAVE plan take effect. Payments will be 5% of discretionary income, while 10-year loan forgiveness will be on the table for those with loan balances of $12,000 or less.

Use Federal Student Aid's Loan Simulator to see how much you might pay under different plans.

If IBR doesn't sound right for you, consider one of the other three income-driven repayment plans: Saving on a Valuable Education (SAVE), PAYE or Income-Contingent Repayment.

In most cases, the least confusing way to select an income-driven plan is to let your servicer place you on the plan with the lowest monthly payment you qualify for. The plan that most federal direct loan borrowers qualify for is likely SAVE.

But specifically choosing IBR may be right for you in the following instances:

The new version of Income-Based Repayment and PAYE are nearly identical. The biggest difference between the two plans is that PAYE limits the amount of interest that can be capitalized, or added to your balance; new IBR does not. This makes PAYE a better option if you’re eligible.

For example, let's say you have a $100,000 loan that's accrued $15,000 in interest. Under PAYE, only 10% — or $10,000 — of that interest could be added to your balance. New IBR would capitalize the entire $15,000, not only costing you that extra $5,000 but also allowing future interest to grow on a higher balance.

Payments under the new version of Income-Based Repayment are capped at 10% of your discretionary income. Unlike some other income-driven plans, IBR never increases your payments higher than what you would pay under the standard 10-year repayment plan — even if that's less than 10% of your discretionary income.

If your income rises enough, though, you may no longer qualify for IBR. This plan requires you to demonstrate a partial financial hardship, which essentially means you can't afford the standard repayment amount. If you stop demonstrating this hardship, your payments would return to the standard amount and any unpaid interest would be capitalized, or added to your balance, increasing the amount you owe.

Consider SAVE instead if you think your income is going to increase greatly or is already high enough that you don’t qualify for IBR. SAVE also caps payments of your discretionary income at 10% — until it drops to 5% in July 2024. However, you are not required to demonstrate partial financial hardship to qualify.

If you’re married, your payments under Income-Based Repayment depend on your tax filing status:

  • File taxes separately. Payments will be based solely on your income.

  • File taxes jointly. Payments will be based on your and your spouse’s income.

Income-driven repayment plans can last up to 25 years. Even if you’re not married now, you may be in the next quarter-century. If you’re using IBR at that point, you could keep your payments low by filing taxes separately.

Talk to a tax professional to understand the pros and cons of different tax filing statuses. You shouldn’t choose or change your status based solely on student loan payments.

The new version of Income-Based Repayment forgives any remaining balance on your loans after 20 years of payment no matter what type of federal loans you have.

Other income-driven plans, including Old IBR, take 25 years until forgiveness or add five extra years to your repayment term if you took out loans for graduate or professional studies.

If you only qualify for Old IBR, consider SAVE instead. While you might not finish repayment earlier — SAVE lasts 25 years for those with grad debt — SAVE subsidizes more interest on your loans than IBR does. This would potentially leave you with a smaller balance to forgive at the end of your repayment term, which is actually a good thing since the forgiven amount would be taxable.

The only income-driven plan that loans from the defunct Federal Family Education Loan Program qualify for is Old Income-Based Repayment.

You can consolidate these loans to make them eligible for additional income-driven options, but that would wipe out any payments you’ve already made toward forgiveness, if applicable. Weigh the pros and cons of consolidation before choosing this option.

How to apply for Income-Based Repayment

You must enroll in Income-Based Repayment. You can do this by mailing a completed income-driven repayment request to your student loan servicer, but it’s easier to complete the process online. You can change your student loan repayment plan at any time.

  • Visit Log in with your Federal Student Aid ID, or create an FSA ID if you don’t have one.

  • Select income-driven repayment plan request. Preview the form so you know what documents to have ready, like your tax return.

  • Choose your plan. If you qualify for more than one income-driven repayment plan, you can be automatically placed in the plan with the lowest payment or specifically choose IBR if it makes the most sense for you.

  • Complete the application. Enter the required details about your income and family. Remember to include your spouse’s information, if applicable, as it will affect your payments under IBR.

You can temporarily self-report income

Through March 2024, borrowers can self-report their income when applying for or recertifying an income driven-repayment plan, according to the Education Department. That means you don't have to submit tax documentation when you report your income. This can be completed online when you submit the IDR application.

To stay on the Income-Based Repayment plan, you must resubmit the income-driven repayment application every year. It's a process called recertification. If your income changes, your payments will change, too.

If you miss the recertification deadline — or you begin earning too much to qualify for IBR — your payments will switch to the amount you'd pay under the standard plan. Any interest will also be capitalized, or added to your principal balance, at that point.

You also have the option for automatic recertification. If you gave consent for your tax information to be accessed when you applied for IDR, then you will be automatically recertified on your recertification date.

Other ways to pay less

If income-driven repayment isn't right for you, the federal government offers extended repayment and graduated repayment plans, which lower your payments but aren’t based on your income. You may pay more interest under these plans, though, and neither offers loan forgiveness.

You also may be able to pay less by refinancing your student loans. Refinancing federal student loans can be risky, as you’ll lose access to income-driven repayment and other federal loan programs and protections. But if you’re comfortable giving up those options and have strong credit as well as a steady income, refinancing may save you money.