Editor's Note: Since the writing of this article, the federal Student Loan Debt Relief program has been blocked due to two court decisions; the Supreme Court has agreed to hear arguments for both appeals in February. In the meantime, the Biden administration extended the federal student loan payment pause into 2023. The US Department of Education announced loan repayments may resume as late as 60 days after June 30, 2023.
After graduation and your six-month federal student loan grace period, it’ll be time to start paying your dues. If you are on the Standard Repayment Plan, you’ll pay at least $50 a month for 10 years. But there are other ways to pay back your student loans: through income-driven repayment plans.
Not all of these plans have the same repayment strategy, and not all federal loans qualify for income-driven repayment. We’ll help you find the one that aligns with your financial situation before you commit.
How Does Income-Based Repayment Work?
The government offers four income-driven repayment plans for holders of federal student loans:
• Income-Based Repayment Plan (IBR)
• Income-Contingent Repayment Plan (ICR)
• Pay As You Earn Repayment Plan (PAYE)
• Revised Pay As You Earn Repayment Plan (REPAYE)
For most income-driven plans, your monthly payment is calculated as a portion of your discretionary income.
Discretionary income is the money that isn’t devoted to necessary bills, like rent or a car loan. Instead, it’s money you have left over after all mandatory payments are made. Money that might be otherwise used for things like dining out or shopping.
On an Income-Based Repayment plan (IBR), your monthly payment is set at 10% to 15% of your discretionary income. The Department of Education guarantees that your new payment will never be more than what you paid through the Standard Repayment Plan. IBR periods are 20 to 25 years, depending on when you borrowed money. If you still owe money after that, any remaining balance is typically forgiven.
In August 2022, President Biden proposed changes to some income-driven repayment programs as part of his Forgiveness plan. Payments for undergraduate borrowers would be reduced to 5% of discretionary income, which would be recalculated as 225% of the poverty level. The loan term would be 20 years, or 10 years for original loan balances less than $12,000. For more details, check out our Guide to Student Loan Forgiveness.
In all cases, the term of the repayment plan is from when you started the IBR plan, not when you started repaying your student loans. For example, if you began IBR five years after you graduated, your IBR period starts then. It doesn’t consider any payments before IBR as part of the term. You can estimate how much your monthly payments will be through the federal Loan Simulator calculator.
Recommended: Should You Refinance Your Student Loans?
The Difference Between Income-Driven Repayment Plans
Deciding which income-driven repayment plan is right for you (and that you may qualify for) depends on your financial situation and your loan type(s). Here’s what they all mean:
• IBR (Income-Based Repayment Plan). Based on your income and family size. The potential IBR payment must be less than what you would pay under the Standard Repayment Plan to qualify. Read more about the Income-Based Repayment Plan.
• ICR (Income-Contingent Repayment Plan). Your monthly payment is adjusted based on your income. It might not lower your payments as much as other plans, but it’s the only IDR plan that allows Parent PLUS Loans.
• PAYE (Pay As You Earn Repayment Plan). You’ll never pay more than the fixed Standard Repayment Plan amount. Payment is 10% of your discretionary income. Any remaining balance after 20 years of payments is forgiven.
• REPAYE (Revised Pay As You Earn Repayment Plan). There are no income eligibility requirements for this IDR. Anyone with qualifying student loans can apply for REPAYE. However, you could end up paying more per month under this plan than the Standard Repayment Plan. If you’re okay with a higher monthly payment, then REPAYE might work for you. Read more about PAYE vs. REPAYE.
Alternatives to Income-Driven Repayment Plans
Aside from the Standard Repayment Plan, there are a few options to consider instead of IDR.
If you have federal student loans, you can get a Direct Consolidation Loan. This will move all your eligible federal student loans into one monthly payment. Your new interest rate is the weighted average of all your loans, rounded up to the nearest eighth of a percent.
This can be helpful if you have many smaller loans that each have a minimum monthly payment. It typically won’t lower your monthly payment, however, but it can make it manageable and easier to keep track of. Only federal loans are eligible for a Direct Consolidation Loan.
Refinancing is similar to consolidation. You get one loan to replace all your other loans, but it’s a new loan with a new interest rate from a private lender or bank. Your credit report and other personal financial factors are considered to see if you’re a responsible borrower. If you previously had a co-borrower, such as a parent, you can look into refinancing without a cosigner.
Many lenders allow you to refinance all your student loans, not just federal student loans. So if you have a mix of private student loans and federal student loans, refinancing will create one new loan with one payment to replace them.
If you qualify for a lower interest rate, you might end up paying less through refinancing than you would through an IDR plan. The interest rate you qualify for can vary depending on factors like how much you owe, your current loan terms, your credit score, and other personal financial information. You can explore different scenarios with our Student Loan Refinance Calculator.
Keep in mind that refinancing doesn’t guarantee a lower payment or interest rate. Along with that, different lenders offer different terms. Because of this, refinancing isn’t always the best option for everyone.
If you’re ready for a deep dive into the topic, this student loan refinancing guide covers all the bases.
How Do You Calculate Income for an Income-Driven Plan?
The Department of Education considers three different components when calculating a borrower’s income. While this may seem needlessly complicated, it actually benefits borrowers.
Any income that’s taxable counts toward the DOE’s calculation. That means regular wages, plus interest and dividends from savings and investments, unemployment benefits, etc. On the flip side, any income that isn’t taxed doesn’t count: gifts and inheritances, cash rebates from retailers, child support payments, and so on.
If you and your spouse file a joint tax return, then their income must also be factored in. If you file separately, only your income counts. The exception: The REPAYE plan requires your spouse’s income information regardless of how you file.
Your family size is the number of people who live with you and receive more than half their support from you. This includes children but also dependent adults, such as an older parent.
There are four income-driven repayment plans for federal student loan holders. The best way to determine which is right for you is by using the Loan Simulator calculator on the StudentAid.gov site. Then carefully weigh your options: Sometimes, a lower monthly payment means paying more in interest over the life of your loan.
If none of the income-driven plans meet your needs, you may consider a Direct Consolidation Loan, which replaces multiple federal and private student loans with a single loan. Another option is student loan refinancing with a private lender. Just be aware that refinancing federal student loans makes you lose access to federal benefits, such as deferment, Public Service Loan Forgiveness (PSLF), and all IDR plans.
If you think that student loan refinancing may be a good option for you, check out student loan refinancing with SoFi. SoFi offers a competitive rate, flexible terms, no hidden fees, and no prepayment penalty — and you can view your rate in 2 minutes.
Checking your interest rate will not affect your credit score.
SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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