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Income-Based Repayment: Is It Right for You?

Income-Based Repayment is one of four options that can make federal student loan payments more affordable.
Loans, Student Loans
How Income-Driven Student Loan Repayment Helped One Borrower — and What It Could Do for You

Income-Based Repayment is a federal program that lowers student loan bills if you’re struggling to afford them.

But Income-Based Repayment is just one of four plans the government offers that tie loan bills to earnings. There’s also Income-Contingent Repayment, Pay As You Earn and Revised Pay As You Earn, and each has different features and qualifications. The right plan will cap your student loan payments at 10% of your monthly discretionary income.

You might also hear these called “income-driven” repayment plans. Moving into an income-driven plan makes sense for you if:

  • 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

Your remaining loan balance will be forgiven after 20 or 25 years, depending on the plan.

The process to sign up for income-driven repayment is straightforward.

  1. Go to studentloans.gov or request a paper application from your loan servicer.
  2. Choose the option that lets your student loan servicer put you on the plan with the lowest monthly payment available.
  3. Recertify every year. If your income or family size changes, your monthly payment could change, too.

Income-driven repayment options

Let’s take a look at your options. Click on the name of each plan for more details.

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.

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

The gotchas of income-driven repayment

While income-driven repayment is a boon for those who need it, the program has some potentially costly quirks.

The right plan will cap your student loan payments at 10% of your discretionary income each month.

You’ll pay more interest. Since income-driven plans extend the repayment term from the standard 10 years to 20 or 25 years, they will lead to big interest charges. To reduce your interest rates, you’re better off investigating student loan refinancing.

You’ll have to pay taxes on the leftover balance. The amount you’re forgiven at the end of the repayment term will be taxed as income, according to current IRS rules. Use Federal Student Aid’s Repayment Estimator to see how much you’ll be on the hook for.

Married borrowers may pay more on Revised Pay As You Earn. This plan takes both spouses’ incomes into account, even if you file taxes separately. That could increase the amount you pay each month. Married borrowers who qualify for Income-Based Repayment or Pay As You Earn should consider choosing those plans instead.

Parent PLUS borrowers must consolidate loans first. Income-Contingent Repayment is the only plan that lets parent borrowers lower loan payments based on earnings. But you must turn your PLUS loans into a direct consolidation loan first to qualify. Apply for consolidation on studentloans.gov.

The rules of income-driven repayment

You must recertify your income and family size every year to remain on an income-driven plan.

Applying is only step one. You must recertify your income and family size every year to remain on an income-driven plan, and your loan servicer will let you know the deadline for reapplying.

Missing the deadline has consequences:

  • If you’re enrolled in Income-Based Repayment, Income-Contingent Repayment or Pay As You Earn, your monthly payment will revert to the amount you would pay on the standard repayment plan, meaning it will no longer be based on your income. If you’re enrolled in the Revised Pay As You Earn plan, you’ll be put on an alternative repayment plan based on the amount you still owe.
  • You’ll have an assumed family size of one. If your family is larger, this could increase your monthly payment or make you ineligible for Income-Based Repayment or Pay As You Earn.
  • If you’re on Income-Based Repayment, Pay As You Earn or Revised Pay As You Earn, any unpaid interest will be capitalized, or added to your principal balance. This will increase the total amount of interest you’ll pay.

Additional repayment options

The government also offers standard and graduated repayment plans that aren’t based on your income. If you can afford to sign up for one of them, they will generally allow you to pay off your loans faster.

Forgiveness options for public service employees can dramatically reduce your debt.

Private student loan repayment options are more limited. While you likely won’t have income-driven repayment plans to choose from, your lender may lower your interest rate or let you make interest-only payments for a period of time.

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