Editor's Note: Since the writing of this article, the federal student loan payment pause has been extended into 2023 as the Supreme Court decides whether the Biden-Harris Administration’s Student Debt Relief Program can proceed. The U.S. Department of Education announced loan repayments may resume as late as 60 days after June 30, 2023.
If your federal student loan payments with the standard 10-year repayment plan are high relative to your income, an income-based repayment plan may be an option. New changes to the plans will curtail interest accrual and cut many borrowers’ payments in half.
You might want to weigh the pros and cons before enrolling.
What Is Income-Based Student Loan Repayment?
Income-based 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 some threshold for 20 or 25 years and you are eligible to get any remaining balance forgiven. (New amendments would forgive balances after 10 years for borrowers with original loans under $12,000.)
By mid-2021, 33% of Direct Loan borrowers were enrolled in an income-based repayment plan, according to the National Student Loan Data System. But borrowers often fail to recertify their income each year, as required, with one exception, and are returned to the standard 10-year amortizing plan.
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 plans. There are four.
• Income-Contingent Repayment (ICR)
• Income-Based Repayment (IBR)
• Pay As You Earn (PAYE)
• Revised Pay As You Earn (REPAYE)
Your payment amount is a percentage of your discretionary income, defined for IBR, PAYE, and REPAYE as the difference between your annual income and 150% of the poverty guideline for your family size and state of residence.
For the ICR plan, discretionary income is the difference between your annual income and 100% of the poverty guideline for your family size and state of residence.
For IBR, PAYE, and REPAYE, the payment is generally 10% of discretionary income. Proposed changes to REPAYE would lower payments to 5% of discretionary income for undergrads, and expand the pool of borrowers making $0 monthly payments.
Recommended: REPAYE vs PAYE: What’s the Difference?
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 |
| REPAYE | Currently 10% of discretionary income, with no cap (5% if new amendments are approved) | Currently 20 years (10 years if new amendments are approved) | 25 years | 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 (go to StudentAid.gov/IDR) 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 have to recertify your income and family size every year. Your calculated payment may change as your income or family size changes.
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 2022 government poverty guideline amount for a family of one in the 48 contiguous states and the District of Columbia is $13,590, and 150% of that is $20,385. The difference between $40,000 and $20,385 is $19,615. That is your discretionary income.
If you’re repaying under the PAYE or REPAYE plan or if you’re a newer borrower with the IBR plan, 10% of your discretionary income is about $1,962. Dividing that amount by 12 results in a monthly payment of $163.46. (New changes would lower REPAYE payments to $81.73.)
Under the ICR plan, if income is $40,000 and 100% of the poverty guideline is $13,590, discretionary income is $26,410. If you qualify to pay 20% of 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
• 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 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
• Negative amortization may occur when your loan payment is less than the new interest that accrues that month, causing the total balance to grow. (This is set to change in July 2023 for all but the IBR plans.)
• 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 income-based repayment plans need to recertify income and family size every year
• If a borrower gets married and files taxes jointly, the combined income could increase loan payments
• The system can be darned confusing
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. Many borrowers of federally held loans do not qualify, and those who have private student loans do not.
If your income is stable and credit good, and you have no need for federal programs like income-driven repayment plans or deferment, refinancing your student loans is an option. The goal is to pay off your existing loans with one new private student loan that has a lower interest rate.
SoFi refinances both federal and private student loans and offers low fixed or variable rates. If you’d like to refinance your student loans, get your interest rate in two minutes.
FAQ
Is income-based repayment a good idea?
For borrowers of federal student loans with high monthly payments relative to their income, it can be.
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.
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 having to follow all the rules for 20 or 25 years.
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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.
CLICK HERE for more information.
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.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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