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Income-Driven Repayment: Is It Right for You?

If you can’t afford your federal student loan payments or you qualify for Public Service Loan Forgiveness, income-driven repayment may be right for you.

Ryan Lane

April 9, 2019

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The federal government offers four income-driven repayment plans that can lower your monthly bills based on your income and family size. Switching to one of these plans is usually right for you in the following instances:

You can’t afford your current payments and are worried about student loan default.
You’ll qualify for Public Service Loan Forgiveness.
You have high debt and a low income.

Here’s what to know about the different income-driven plans before you sign up.

» MORE: Estimate your income-driven payment

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:

» MORE: PAYE vs. REPAYE: How to choose

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.

Plan	Best if you
Revised Pay As You Earn	Aren’t married. Don’t have graduate loans. Have high earning potential.
Pay As You Earn	Are married with two incomes. Have graduate loans. Have low earning potential.
Income-Based Repayment	Don’t qualify for PAYE. Have FFELP student loans.
Income-Contingent Repayment	Have parent PLUS loans. Want to reduce payments slightly.

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 Repayment Estimator. This will give a good idea of your monthly bills, overall costs and forgiveness amounts under each plan.

Income-driven repayment disadvantages

While income-driven repayment options can make monthly student loan payments more affordable, these programs do have some potential disadvantages.

You’ll pay more interest

Income-driven plans extend your repayment term from the standard 10 years to 20 or 25 years. Since you’ll be repaying your loan for longer, more interest will accrue on your loans. That means you may pay more under these plans — even if you qualify for forgiveness.

You’ll pay taxes on the forgiven balance

It’s possible you’ll pay off your loan before forgiveness kicks in. But if you have a balance left at the end of the repayment term, the forgiven amount will be taxed as income unless you qualify for Public Service Loan Forgiveness.

You must recertify your income and family size every year

You must recertify income-based repayment every year to stay on your plan. 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.

» SIGN UP: Get a free plan to ditch your debt

How to apply for income-driven repayment

You can apply for income-driven repayment at studentloans.gov or by sending your student loan servicer 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 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.

» MORE: How to change your student loan repayment plan

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.

The federal government offers extended repayment and graduated repayment plans, which lower your payments but aren’t based on your income.

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.

» MORE: Should I refinance my student loans?

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