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Understanding Income-Driven Repayment Plans for Student Loans

Income-driven repayment (IDR) plans can significantly reduce your monthly student loan payments based on your income and family size. For some borrowers, payments could be as low as $0 per month, and you may still qualify for student loan forgiveness. Here’s what you need to know about IDR plans.

What Is an Income-Driven Repayment Plan?

Income-driven repayment plans are designed to lower payments on federal student loans by basing your payment amounts on your income and family size. This can help you avoid late payments or defaulting on your loans. For those with low or no income, IDR may reduce your monthly payments to $0. Note that IDRs do not apply to private student loans.

There are four types of income-driven repayment plans:

• Saving on a Valuable Education (SAVE) Plan: Formerly the Revised Pay As You Earn (REPAYE) plan, this plan typically requires payments of 10% of your discretionary income. Starting July 2024, minimum payments will drop to 5% of discretionary income. Forgiveness is available after 20 years for undergraduate debt or 25 years for graduate debt.
• Pay As You Earn Repayment (PAYE): Payments are typically 10% of your discretionary income and are always less than what you’d pay under the 10-year Standard Repayment Plan. Forgiveness is available after 20 years.
• Income-Based Repayment (IBR): Payments are capped at 10% of your discretionary income if you became a new borrower on or after July 1, 2014, with a 20-year repayment term. For earlier loans, payments are 15% of your income for up to 25 years. Forgiveness is available at the end of the repayment term.
• Income-Contingent Repayment (ICR): Payments are either 20% of your discretionary income or what you would pay on a fixed repayment plan with a 12-year term, whichever is lower. Forgiveness is available after 25 years.

If you qualify for $0 per month payments through IDR, these payments still count toward balance forgiveness. Periods of deferment due to economic hardship and loan forbearance, such as the COVID-19 student loan payment pause, also count toward forgiveness.

How to Use Income-Driven Repayment to Reduce Your Student Loan Payments

1. Estimate Your Payments

The Federal Student Aid Loan Simulator can help you estimate your payments and compare different plans. This tool can help you find the best payment plan for you and understand how your payments will affect your balance over time.

2. Consider Balance Forgiveness Taxation

Each income-driven repayment plan is compatible with Public Service Loan Forgiveness (PSLF). If you qualify for PSLF, you only need to make payments for 10 years to be eligible for forgiveness. Without PSLF, you need to make payments for 20 or 25 years. Note that student loan balance forgiveness can be taxed, resulting in a potentially unaffordable tax bill, whereas PSLF is tax-free.

3. Factor In Interest

Income-driven repayment plans can lead to negative amortization, where your balance grows over time because your payments don’t cover the accruing interest. This can be concerning, but if you’re working toward PSLF, negative amortization may not harm you since you won’t be taxed on your forgiven balance. However, failing to recertify or no longer qualifying for your IDR plan could result in larger standard payments due to a larger balance.

4. Work With Your Servicer

To determine which plans you’re eligible for, ask your loan servicer. You can fill out an application requesting your servicer to place you on the income-driven repayment plan that sets your payments as low as possible.

Additional Ways to Lower Your Student Loan Payments

If income-driven repayment isn’t the right option for you, consider these alternatives:

Consider an Extended Repayment Plan

An extended repayment plan can lower your monthly payments by extending your loan term to 25 years. This option may help if you don’t qualify for income-based repayment, but keep in mind that you’ll pay more in interest over time.

Consolidate Your Loans

If you have multiple federal student loans with various interest rates, consolidating them through the federal government can streamline your repayment. You may also extend your term up to 30 years, which can lower your monthly payments. However, extending your term means paying more in interest over time.

Refinance Your Loans

Refinancing student loans through a private lender may be an option for those with good credit and a stable income. This could help you qualify for a lower interest rate. However, refinancing with a private lender means losing access to federal student loan programs like loan forgiveness and income-driven repayment plans.

Make a Plan to Pay Back Student Debt

While a calculator can help you figure out your payments, only you can determine if a lower payment now will benefit you in the future. Lowering your payments with an income-driven repayment plan may free up cash now, but make sure you understand how it will impact the cost of your loan long term.

If you need help understanding your options, contact your student loan servicer or a financial advisor. A reputable credit counselor may also help you develop a plan for paying off your student loans. If money is tight, consider working with a nonprofit that offers no-cost financial assistance.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We are here to help you navigate your financial journey with confidence.

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