Income-Driven Repayment: Is It Right for You?
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The federal government offers four income-driven repayment, or IDR, plans that can lower your monthly bills based on your income and family size. Payments could even be $0 if you're unemployed or earn less than 150% or 225% of the poverty threshold, depending on the plan you choose.
Switching to one of these plans is usually right for you in the following instances:
You can’t afford your current payments and want to avoid late payments and student loan default.
You’ll qualify for Public Service Loan Forgiveness.
You have high student loan debt and a low income or are unemployed.
Here’s what to know about the different income-driven plans before you sign up.
Which income-driven repayment plan is best for you?
All income-driven repayment plans share some similarities: Each caps payments to between 10% and 20% of your discretionary income and forgives your remaining loan balance after 20 or 25 years of payments. The four plans are:
Saving on a Valuable Education (SAVE), which replaced the REPAYE plan.
The least confusing way to select a plan is to let your servicer place you on the one you qualify for that has the lowest monthly payment. You can choose this option when you complete the income-driven repayment plan application.
But the plans do have some distinct differences. A specific one may be necessary, or best for you, in the following instances.
Payments under every income-driven plan count toward Public Service Loan Forgiveness. If you’ll qualify for this program, choosing the plan that offers you the smallest payment is likely your best bet.
Before enrolling in any income-driven plan, plug your loan information into Federal Student Aid’s Loan Simulator. This will give a good idea of your monthly bills, overall costs and forgiveness amounts under each plan.
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What about the new IDR plan?
There's a new IDR plan, SAVE, which has replaced the formerly available REPAYE plan.
SAVE's final rules illustrate the most generous federal student loan repayment option yet:
Borrowers earning less than about $32,800 individually, or less than $67,500 for a family of four, would see $0 monthly bills.
Most other borrowers would see their payments cut by at least half.
Students who borrow less than $12,000 would see their remaining balances wiped away after 10 years of payments, instead of 20 to 25 years.
If you are already enrolled in REPAYE, you will automatically move over to SAVE when it becomes available. Otherwise, you can sign up for SAVE online now. Applications take about four weeks to process.
You must recertify your income and family size every year
To keep your income-driven repayment status you must recertify income-based repayment every year. If your income changes, your payments will change, too. If you miss the recertification deadline, you’ll have to pay more — likely the standard repayment plan amount — until you re-enroll. Any interest will typically be capitalized, or added to your principal balance, at that point.
The earliest you could be required to recertify for IDR is March 1, 2024. Borrowers will be notified when it is time to recertify. If you see a recertification deadline in your studentaid.gov account before March 1, then it'll be moved out by a year. So, a Nov. 15, 2023 deadline will be changed to Nov. 15, 2024.
Income-driven repayment disadvantages
While income-driven repayment options can make monthly student loan payments more affordable, these programs do have some potential disadvantages.
IDR waiver will count past payments toward forgiveness
Millions of borrowers are expected to benefit from a one-time IDR account adjustment, or waiver, that will count past payments toward the 240 or 300 needed for IDR forgiveness. The Education Department will update accounts starting in the spring of 2023, and continue through 2024.
The account adjustment will be automatic for most, and deferment and forbearance periods will count toward IDR forgiveness. Millions of longtime borrowers could receive loan forgiveness, and millions more are expected to receive at least three years of additional credit toward IDR forgiveness.
How to apply for income-driven repayment
You can apply for income-driven repayment at studentaid.gov or by contacting your federal student loan servicer and sending them a paper request form. You can change your student loan repayment plan at any time.
To complete the application, you will need to provide information about your family size and your most recent federal income tax return or transcript. If you didn’t file taxes, you’ll need to submit alternate proof of any taxable income you’ve earned within the past 90 days, such as:
Pay stubs.
A letter from your employer listing your gross pay.
A signed statement explaining your income, if formal documentation is unavailable.
Your servicer can put your loans in a temporary forbearance while processing your application. You aren’t required to make payments during forbearance, but interest will accrue on your loan. This increases the amount you owe.
Can’t afford income-driven repayment?
Factors besides your income can affect how income-driven payments are calculated. If your payments end up being too high, 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.
Refinancing your student loans with a private lender could also reduce your monthly payments, depending on the new loan’s terms. But refinancing federal student loans can be risky, as you’ll lose access to programs like income-driven repayment and loan forgiveness. Be sure you’re comfortable giving up those options before refinancing.
