Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.
If you’re on the standard 10-year repayment plan and your federal student loan payments are high relative to your income, a student loan income-based repayment plan may be an option for you.
New changes to the plans, including a new plan called SAVE that was introduced by the Biden Administration, will reduce many borrowers’ payments. Read on to learn whether income-based student loan repayment might be right for your situation.
What Is Income-Based Student Loan Repayment?
Income-based student loan repayment plans were conceived to ease the financial hardship of government student loan borrowers and help them avoid default when struggling to pay off student loans.
Those who enroll in the plans tend to have large loan balances and/or low earnings. Graduate students, who usually have bigger loan balances than undergrads, are more likely to enroll in a plan.
The idea is straightforward: Pay a percentage of your monthly income above a certain threshold for 20 or 25 years and you are eligible to get any remaining balance forgiven. (The SAVE plan would forgive balances after 10 years for borrowers with original loans of $12,000 or less.)
By the end of 2022, 45% of Direct Loan borrowers were enrolled in an income-based repayment plan, according to Federal Student Aid, an office of the U.S. Department of Education. But borrowers have often failed to recertify their income each year, as required, and are returned to the standard 10-year plan.
💡 Quick Tip: Often, the main goal of refinancing is to lower the interest rate on your student loans — federal and/or private — by taking out one loan with a new rate to replace your existing loans. Refinancing makes sense if you qualify for a lower rate and you don’t plan to use federal repayment programs or protections.
4 Income-Driven Student Loan Repayment Plans
While people often use the term “income-based repayment” generically, the Department of Education calls them income-driven repayment (IDR) plans. There are four.
• Income-Contingent Repayment (ICR)
• Income-Based Repayment (IBR)
• Pay As You Earn (PAYE)
• Saving on a Valuable Education (SAVE), which replaces the previous Revised Pay As You Earn (REPAYE) plan
Your payment amount is a percentage of your discretionary income, defined for IBR and PAYE as the difference between your annual income and 150% of the poverty guideline for your family size.
For the SAVE plan, discretionary income is the difference between your annual income and 225% of the poverty line for your family size. This new plan could substantially reduce borrowers’ monthly payment amounts compared to other IDR plans.
For the ICR plan, discretionary income is the difference between your annual income and 100% of the poverty guideline for your family size.
For IBR, PAYE, and SAVE the payment is generally 10% of your discretionary income. Changes to SAVE that are scheduled to go into effect in July 2024 would lower payments to 5% of discretionary income for undergrads, and expand the pool of borrowers making $0 monthly payments.
For ICR, the payment is the lesser of these: 20% percent of discretionary income or what you would pay on a repayment plan with a fixed payment over 12 years, adjusted using a formula that takes income into account.
Parent PLUS borrowers may access ICR if they consolidate into a Direct Consolidation Loan.
Got it? But wait; there’s more. Note the number of years in which consistent, on-time payments must be made and after which a balance may be forgiven, as well as who qualifies.
| Plan | Monthly Payment | Term (Undergrad) | Term (Graduate) | Who Qualifies |
|---|---|---|---|---|
| ICR | 20% of discretionary income (or income-adjusted payment on 12-year plan) | 25 years | 25 years | Any borrower (this is the only plan that includes parent PLUS Loan holders if they consolidate) |
| IBR | 15% of discretionary income (but never more than 10-year plan) | 25 years | 25 years | Borrowers who took out loans before July 1, 2014 |
| Newer IBR | 10% of discretionary income (but never more than 10-year plan) | 20 years | 20 years | Borrowers who took out their first loans after July 1, 2014 |
| PAYE | 10% of discretionary income (but never more than 10-year plan) | 20 years | 20 years | Borrowers who took out first loan after Sept. 30, 2007, and took out a new loan or consolidated existing loans after Sept. 30, 2011 |
| SAVE | Currently 10% of discretionary income, with no cap (will be lowered to 5% in July 2024) | Currently 20 years (starting in July 2024, it will be 10 years for borrowers with original loan balances of $12,000 or less) | 25 years (starting in July 2024, it will be 10 years for borrowers with original loan balances of $12,000 or less.) | Any borrower |
How Income-Based Student Loan Repayment Works
In general, borrowers qualify for lower monthly loan payments if their total student loan debt at graduation exceeds their annual income.
To figure out if you qualify for a plan, you must apply at StudentAid.gov and submit information to have your income certified. Your monthly payment will then be calculated. If you qualify, you’ll make your monthly payments to your loan servicer under your new income-based repayment plan.
You’ll generally have to recertify your income and family size every year. Your calculated payment may change as your income or family size changes.
💡 Quick Tip: When rates are low, refinancing student loans could make a lot of sense. How much could you save? Find out using our student loan refi calculator.
What Might My Student Loan Repayment Plan Look Like?
Here’s an example:
You are single and your family size is one. You live in one of the 48 contiguous states or the District of Columbia. Your adjusted gross income is $40,000 and you have $45,000 in eligible federal student loan debt.
The 2023 government poverty guideline amount for a family of one in the 48 contiguous states and the District of Columbia is $14,580, and 150% of that is $21,870. The difference between $40,000 and $20,385 is $18,130. That is your discretionary income.
If you’re repaying under the PAYE plan or if you’re a newer borrower with the IBR plan, 10% of your discretionary income is about $1,813. Dividing that amount by 12 results in a monthly payment of $151.08.
Under the SAVE Plan, however, your discretionary income is the difference between your gross income and 225% of the poverty line, which comes out to $32,805. The difference between $40,000 and $32,805 is $7,195, which is your discretionary income; 10% of your discretionary income is about $720. That amount divided by 12 results in a monthly payment of $60.
Under the ICR plan, if your income is $40,000 and 100% of the poverty guideline is $13,590, your discretionary income is $26,410. If you qualify to pay 20% of your discretionary income, your monthly payment would be about $440.
The Federal Student Aid office recommends using its loan simulator to compare estimated monthly payment amounts for all the repayment plans.
Which Loans Are Eligible for Income-Based Repayment Plans?
Most federal student loans are eligible for at least one of the plans.
Federal Student Aid lays out the long list of eligible loans, ineligible loans, and eligible if consolidated loans under each plan.
Of course, private student loans are not eligible for any federal income-driven repayment plan, though some private loan lenders will negotiate new payment schedules if needed.
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Pros and Cons of Income-Based Student Loan Repayment
Pros
• Borrowers gain more affordable student loan payments.
• Any remaining student loan balance is forgiven after 20 or 25 years of repayment; and, as of July 2024, after 10 years of repayment for those in the SAVE plan with original loan balances of $12,000 or less.
• An economic hardship deferment period counts toward the 20 or 25 years.
• The plans provide forgiveness of any balance after 10 years for borrowers who meet all the qualifications of the Public Service Loan Forgiveness (PSLF) program.
• The government pays all or part of the accrued interest on some loans in some of the income-driven plans.
• Low-income borrowers may qualify for payments of zero dollars, and payments of zero still count toward loan forgiveness.
• New federal regulations will curtail instances of interest capitalization and suspend excess interest accrual when monthly payments do not cover all accruing interest.
Cons
• Stretching payments over a longer period means paying more interest over time.
• With some IDR plans negative amortization may occur when your loan payment is less than the new interest that accrues that month, causing the total balance to grow. However, with the SAVE, PAYE, or IBR plans, if your monthly payment amount doesn’t cover all of the interest that accrues on your loans, the government will pay all or a portion (the amount depends on the plan) of the remaining accrued interest due each month. With SAVE, for instance, the government will pay all of the interest that isn’t covered by your payment.
• Forgiven amounts of student loans are free from federal taxation through 2025, but usually the IRS treats forgiven balances as taxable income (except for the PSLF program).
• Borrowers in most income-based repayment plans need to recertify income and family size every year.
• On some plans, if a borrower gets married and files taxes jointly, the combined income could increase loan payments. (This is not the case with the SAVE Plan.)
• The system can be confusing to navigate.
Student Loan Refinancing Tips From SoFi
Income-driven repayment plans were put in place to tame the monthly payments on federal student loans for struggling borrowers. For instance, the new SAVE Plan offers the lowest monthly payments of all IDR plans. (Those who have private student loans don’t qualify for IDR plans.)
If your income is stable and your credit is good, and you don’t need federal programs like income-driven repayment plans or deferment, refinancing your student loans is an option. (To be clear, refinancing federal student loans makes them ineligible for federal protections and programs like income-driven repayment and loan forgiveness for public service.) With refinancing, the goal is to pay off your existing loans with one new private student loan that ideally has a lower interest rate.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
Is income-based repayment a good idea?
For borrowers of federal student loans with high monthly payments relative to their income, income-based repayment can be a good idea. Borrowers may want to check out the new SAVE Plan, which provides the lowest monthly payments of all the income-driven repayment options.
What is the income limit for income-based student loan repayment?
There is no limit. If your loan payments under the 10-year standard repayment plan are high for your income level, you may qualify for income-based student loan repayment.
What are the advantages and disadvantages of income-based student loan repayment?
The main advantage is lowering your monthly payments, with the promise of eventual loan forgiveness if all the rules are followed. A disadvantage is that you have to wait for 10, 20, or 25 years depending on the plan you’re on and how much you owe.
How does income-based repayment differ from standard repayment?
With the standard repayment plan, your monthly payments are a fixed amount that ensures your student loans will be repaid within 10 years. Under this plan, you’ll generally save money over time because your monthly payments will be higher. With income-based repayment, your monthly loan payments are based on your income and family size. These plans are designed to make your payments more affordable. After a certain amount of time ranging from 10 to 25 years, depending on the plan, any remaining balance you owe is forgiven.
Who is eligible for income-based repayment plans?
Under the new SAVE plan, any student loan borrower with eligible student loans can participate in the plan. With the PAYE and IBR plans, in order to be eligible, your calculated monthly payments, based on your income and family size, must be less than what you would pay under the standard repayment plan. Under the ICR plan, any borrower with eligible student loans may qualify. Parent PLUS loan borrowers are also eligible for this plan.
How is the monthly payment amount calculated in income-based repayment plans?
With income-based repayment, your monthly payment is calculated using your income and family size. Your payment is based on your discretionary income, which is the difference between your gross income and an income level based on the poverty line. The income level is different depending on the plan. With the SAVE Plan, for instance, your discretionary income is the difference between your gross annual income and 225% of the poverty line for your family size.
For IBR, PAYE, and SAVE your monthly payment is generally 10% of your discretionary income. Changes to SAVE that are scheduled to take place in July 2024 would reduce your payments to 5% of your discretionary income.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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