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Income-Based Repayment: Everything You Need to Know

Income-Based Repayment is the best way to lower federal student loan bills if you're struggling to pay them and you first borrowed after July 1, 2014.
Loans, Student Loans
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Income-Based Repayment is a federal program that makes student loan bills cheaper. If you meet the following criteria, it’s the best way to lower your payments:

  • You have federal student loans
  • You’re looking for help reducing your payments
  • Your current federal loan bill is more than 10% of your discretionary income
  • You started borrowing money for school after July 1, 2014

Income-Based Repayment will lower your bill to 10% of your discretionary income, and the remaining balance will be forgiven after 20 years of payments.

People who first borrowed loans before July 1, 2014, will pay more on Income-Based Repayment, so the Pay as You Earn or Revised Pay As You Earn plans may be better bets. Here’s an overview of all four income-driven repayment plans.

PlanWho it's best for
Income-Based RepaymentFederal loan borrowers whose bills are more than 10% of discretionary income, and who started borrowing money for school after July 1, 2014. Borrowers with older loans might fare better with Pay As You Earn, if they qualify, or Revised Pay As You Earn if they don’t.
Income-Contingent RepaymentParent PLUS loan borrowers; it’s the only plan available to them. Payments are capped at 20% of discretionary income, and you must consolidate your PLUS loans to qualify.
Pay As You EarnFederal loan borrowers whose bills are more than 10% of discretionary income; who were new direct loan borrowers on or after Oct. 1, 2007; and who took out another direct loan on or after Oct. 1, 2011.
Revised Pay As You EarnFederal loan borrowers whose bills are more than 10% of discretionary income and who don’t qualify for other plans. Married borrowers may pay more on this plan than on the others.

If Income-Based Repayment is right for you, here’s what to know before going for it.

1. You must meet income requirements

Not all federal loan borrowers will qualify for Income-Based Repayment. The amount you’d pay on the 10-year standard plan must be more than what you’d pay on the income-based plan in order to sign up.

The amount you’d pay on the 10-year standard plan must be more than what you’d pay on the income-based plan in order to qualify.

If you took out your first federal student loan before July 1, 2014, your loan bill on Income-Based Repayment will be capped at 15% of your monthly discretionary income. If you took out your first loan on or after July 1, 2014, the cap is 10%.

Here’s how to figure out what your Income-Based Repayment bill would be. First, calculate your discretionary income: It’s the amount you earn per year minus 150% of the federal poverty guideline for your state and family size. Next, divide that number by 12 to get the monthly amount. This income-driven repayment calculator will do the math for you.

2. There are more generous options if you borrowed before July 1, 2014

Since Income-Based Repayment debuted, the U.S. Department of Education has released additional plans that offer better deals for some borrowers.

If you took out loans earlier than July 1, 2014, look into Revised Pay As You Earn or Pay as You Earn. These two plans max out your monthly payments at 10% of discretionary income instead of 15% on the original version of Income-Based Repayment.

However, Revised Pay As You Earn extends repayment to 25 years for any borrower with grad school loans, and it requires you to include your spouse’s income on your application even if you file taxes separately.

3. Not all loan types are eligible

Your federal loans must be direct loans or loans made under the Federal Family Education Loan (FFEL) program to be eligible for Income-Based Repayment.

PLUS loans made to parents don’t qualify. Parent borrowers can consolidate their loans and sign up for Income-Contingent Repayment instead.

You can consolidate Perkins loans in order to repay them on the income-based plan. But take care: When you consolidate Perkins loans, you’ll lose access to public-service loan cancellation programs that could wipe out your entire Perkins loan balance.

4. You’ll get forgiveness after 20 or 25 years

New borrowers as of July 1, 2014, will have the remainder of their loans forgiven after 20 years of payments, and those who borrowed before that will see forgiveness after 25 years.

Current IRS rules state you’ll have to pay income tax on the amount forgiven. Consider starting to save for your tax bill now or paying more than you need to during months when you have extra cash.

Current IRS rules state you’ll have to pay income tax on the amount forgiven.

Many borrowers on Income-Based Repayment won’t receive forgiveness because they’ll pay off their loans before 20 or 25 years are up. Check Federal Student Aid’s Repayment Estimator to find out if that’s the case for you.

5. Recertify your income every year

It’s free to sign up for income-driven repayment on studentloans.gov. If you know Income-Based Repayment is the plan you want, choose it on the form. If you’re not sure which plan to go with, check the box requesting the plan that will give you the lowest monthly payment.

You must recertify your income, using the same form, every year you’re on Income-Based Repayment. Your payment will increase or decrease as your income and family size change, but it will never be more than what you’d pay on the standard plan, even if your income rises dramatically.

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