Pros and Cons of Income-Driven Repayment Plans for Student Loans


What we’ll cover:


You might have heard the term “income driven repayment plan” before, but do you know what it means, and if it’s an option for you?

For a lot of people, student loans are a last-minute solution that help them get the rest of the money they need to pay for college. Frenzied students and families focus on finding a lender and getting approved for loan in time for school—but they might not think ahead and fully understand how and when they’ll repay the loan.

One option that’s available to a lot of student loan borrowers is something called an income driven repayment plan. Understanding what an income driven repayment plan is and how it works can help you figure out if it might be an option for you.

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What Is Income Driven Repayment?

Income driven repayment plans help student loan borrowers lower their monthly federal student loan payments, based on how much money they make.

It’s important to note, income driven repayment plans are only applicable to federal student loans. Those are loans that came from the federal government. Income driven repayment plans don’t apply to private student loans, those from banks and other financial institutions.

Basically, income driven repayment includes four different plans that base a borrower’s monthly loan payment on their income—regardless of how much total debt they have, or what repayment plan they originally chose. In addition to income, the borrower’s family size and a few other factors are also considered when calculating monthly repayments.

The main benefit of income driven repayment plans is that they can lower the required monthly loan payments, making things easier for borrowers who are struggling to make payments. Income driven repayment plans can be especially helpful for borrowers with low or no income who don’t have any other options.

All income driven repayment plans are designed so that the new monthly payments are always lower than they would be with a standard repayment plan. For unemployed borrowers and those with low income, the payments might even be zero, for a time.

The different types of income driven repayment plans

There are four income driven repayment plans. Each one has its own eligibility requirements and each one calculates monthly payment amounts differently.

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1. Income Contingent Repayment (ICR)

  • Monthly payment calculation: Based on 20% discretionary income, adjusted gross income, and family size
  • Eligible Loans: Only Direct Loans but not including parent PLUS loans
  • Repayment term for undergrad student loans – 300 payments over 25 years

2. Income-Based Repayment (IBR)

  • Monthly payment calculation: Based on adjusted gross income, family size, and 10% or 15% of discretionary income, based on loan disbursement dates
  • Eligible loans: FFELP and Direct Loans excluding parent PLUS loans and consolidation loans
  • Repayment term for undergrad student loans – 300 payments over 25 years

3. Pay-As-You-Earn Repayment (PAYE)

  • Monthly payment calculation: Based on 10% of discretionary income adjusted gross income, family size, and total federal student loan balance
  • Eligible loans: Only Direct Loans
  • Repayment term for undergrad student loans – 240 payments over 20 years

4. Saving on a Valuable Education (SAVE)

  • Monthly payment calculation: Based on 10% of discretionary income adjusted gross income, family size, and total federal student loan balance
  • Eligible loans: Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans made to students, Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents
  • The max repayment term is capped at 20 years for borrowers with only undergraduate loans and 25 years for borrowers with graduate school loans.

How Do Income Driven Repayment Plans Work?

Enrollment in income driven repayment plans is valid for one year only. Once you enroll in any income-based repayment plan, you need to recertify the plan every year. Recertification involves re-submitting your income and other financial documents by the annual deadline. Your next year’s monthly payments recalculate based on your updated financial circumstances. This includes your current monthly income, total loan balance, and family size.

Failing to recertify your income-based repayment plan could result in your payments being increased. In addition, the unpaid interest could be capitalized (added to the loan principal).

After you’ve completed 20 or 25 years of payments (depending on your plan), the outstanding student loan balance is forgiven. Borrowers who qualify for Public Service Loan Forgiveness (PSLF) get the added benefit of tax-free student loan forgiveness. The loan must meet certain requirements to get the tax-free benefit.

Is an Income Driven Repayment Plan Good for Me?

Income driven repayment plans are a great solution for you if you can’t afford your loan payments on current your income. Because these plans are based on how much money you have coming in, you could end up with a lower monthly payment that’s easier for you to make on time each month.

Consider enrolling in an income driven repayment plan, if any of these apply to you:

You’re earning zero dollars or low income.

Monthly payments are calculated as a percentage of your monthly income so they’re more affordable. If you’re unemployed, your monthly loan payment could be zero.

You’re struggling to make your monthly payments and are at risk of defaulting on your loan.

Even with a steady job, making loan payments can still be tough. But missing payments can have major consequences. Not only will you have to pay late fees and even more interest, but your credit score will also take a hit. Enrolling in an income driven repayment plan reduces your monthly payments (hopefully, lowering the risk of defaulting on your student loans).

You have high student loan debt but need to free up cash for other expenses.

The higher your student loan debt, the higher your monthly payments will be. Income driven repayment plans lower your monthly payment amount, freeing up money for other essential expenses.

You’re near the beginning of your current student loan repayment plan.

Enrolling in any income driven repayment plan restarts the clock on repayment. Your new repayment plan will typically be about 20 to 25 years. Income driven repayment plans are a good option for recent grads, or those with relatively new student loans. If you’ve been making payments for a long time and only have a few years left on your loan term, it’s better to do whatever you can to pay off the debt. Get rid of it! Don’t extend it even longer.

You qualify for Public Service Loan Forgiveness.

Income drive repayment plans are a mandatory requirement for forgiveness. PSLF forgives your outstanding student loan balances after 10 years of working in public service. If your job qualifies you for PSLF, you must enroll in one of the student loan income-driven plans.

Which income driven repayment plan is best for me?

Each of the income driven repayment plans we covered calculates your monthly payment amount differently. The best plan for you will depend on the type of loans you have, as well as your financial and personal circumstances. Using a student loan calculator can help you figure out which repayment plan is best for you. Give some thought to your financial circumstances and long-term goals before enrolling in any income driven repayment plan.

If you are seriously struggling, definitely look into income driven repayment plans. On the other hand, if you have steady income and have been able to make your payments on time each month, you’re probably better of continuing with that. You’ll pay off your loan faster and save money, because you’ll pay less interest in the long run. Be honest with yourself about what you can actually do.

What are some advantages and disadvantages of income driven repayment plans?

While these plans offer some important benefits, they do have a few downsides too. Understanding the advantages and disadvantages of income driven repayment plans can help you figure out whether one could be right for you.

Advantages of income driven repayment plans:

  1. You’ll get Lower monthly student loan payments. If you’re unemployed or low income, your payments will be lower than the standard payments, and might even be zero, for a time.
  2. You can free up cash for other expenses. Lower monthly student loan payments allow you to put more money toward essentials like groceries, rent, and transportation to and from work.
  3. There will be no impact to your credit score. Your enrollment in an income driven repayment plan is not reported to credit bureaus and doesn’t affect your credit score. As long as you make your loan payment (no matter how low it is) on time each month, you’ll see no impact to your credit. But just like with any loan, missing or late payments will hurt your credit score.

Disadvantages of income driven repayment plans:

  1. You’ll pay more in interest over time. If you’re stretching your loan out over a longer period of time, your monthly payments will be lower, but you’re going to pay more in interest in the long run.
  2. You’ll have student debt for longer. Lower monthly payments can be a life-saver for a lot of people. But if you have steady income and you’re able to make your regular payments, do it! You’ll get out of debt faster and you can take the money you were using for monthly payments and put it toward other financial goals, like an emergency fund or retirement account.

How to Apply For An Income-Driven Repayment Plan

Once you’ve figured out that an income driven repayment plan is right for you, you have to choose a plan and submit an application.

Follow these steps to apply for your chosen plan:

  1. Sign in to your FSA account.
  2. In your account, navigate to repayment plans.
  3. Enter your personal information. If you’re married, you’ll need to also enter your spouse’s information.
  4. Enter your family size.
  5. Enter your income information. The easy way to do this is by transferring your up-to-date IRS data using the IRS Data Retrieval Tool provided. This tool gathers your information directly from the IRS website.
  6. Select the plan you want to enroll in. If your loan doesn’t qualify for that plan, it won’t let you submit the request. Choose another plan and submit your application.

Remember, you’ll need to recertify your plan every year using this same process.

Still Need Money For School?

If you’ve already applied for scholarships and submitted your FAFSA and you still need help paying for school—use College Raptor’s Student Loan Finder to find personalized loan recommendations. Compare lenders and interest rates to find the right student loan for you.

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