Income-driven repayment: Is it right for me?

The average borrower’s federal student loan balance is $45,300, according to the latest data from the National Center for Education Statistics. Assuming a 5.50% fixed rate over a standard 10-year term, that translates to an average monthly payment of $492. 

If you’re struggling to manage high student loan payments, an income-based repayment plan might help. Although they’re sometimes referred to as “income-based” plans, they’re more accurately called income-driven repayment (IDR) plans. Your income and family size are the main factors of your payment calculation under these plans. For some borrowers, it can unlock $0 monthly payments.

You may consider switching to an income-driven repayment plan if: 

• You’re a recent graduate with a low-paying job
• You’re struggling to afford your monthly federal student loan payments 
• Your income is low or has recently dropped 
• You can qualify for the Public Service Loan Forgiveness (PSLF) program 

How does income-driven repayment work? 

Income-driven repayment (IDR) plans work by adjusting your monthly student loan payments based on your income and family size. The goal of IDR plans is to make repayment more manageable based on your financial situation. Your payments are generally set at a percentage of your discretionary income, which is calculated as the difference between your annual income and 150% of the poverty guideline for your family size and state (250% for the SAVE plan). After making 10 to 25 years of payments, your remaining loan balance is forgiven. 

Types of income-driven plans

There are four types of income-based plans you can select, and each has its own payment rules and eligibility requirements:

• Saving on a Valuable Education (SAVE)
• Pay As You Earn (PAYE)
• Income-Based Repayment (IBR)
• Income-Contingent Repayment (ICR)

Compare IDR plans

Related: PAYE vs. SAVE: Compare your options

Which IDR plan is best for you? 

To see how these repayment plans could affect your debt, use the loan simulator tool on StudentAid.gov. It lets you plug in your loan information and gives you a repayment breakdown for each IDR option. You can also directly contact your loan servicer to be placed on an IDR plan you qualify for that will give you the lowest monthly payment. Generally, here are the types of borrowers who might benefit most from each plan:

About SAVE, the new IDR plan 

In August 2023, the Biden-Harris administration announced that the Revised Pay As You Earn (REPAYE) plan would be replaced by the SAVE plan. This is the newest and most affordable IDR plan available. 

SAVE is so advantageous because of how it calculates your payments. This new plan increases the income exemption to 225% of the poverty line, up from REPAYE’s 150%. This means that more of your earnings are protected and monthly payments are lower.

The SAVE plan uses your income and family size to determine your monthly payment. Payments are set at 10% of your discretionary income with a repayment term starting at 10 years for borrowers with original loan balances of $12,000 or less. The repayment term increases by one year for every additional $1,000 borrowed above $12,000, with a maximum term of 25 years. 

Additionally, any interest that your monthly payment doesn’t cover is 100% subsidized. As long as you keep up with payments, your balance won’t ever increase because of unpaid interest, which means you can pay off your loan faster and with fewer out-of-pocket expenses. Plus, the initial rollout excludes spousal income from your payment calculation, making a lower payment more likely.

Pros and cons of IDR

Although IDR plans offer a solution to unmanageable student loan payments, they’re not right for everyone. 

Advantages of IDR plans

• More affordable monthly payment: You have long-term access to a low monthly payment. Payments are based on your income and family size, so if your income decreases or your family grows, you can have your payments adjusted to match your new financial situation.
• Access to loan forgiveness: IDR offers a straightforward path to student loan forgiveness after completing your required payments, without employment-based restrictions.
• Eligibility for Public Service Loan Forgiveness (PSLF): Enrollment in an IDR plan is required for borrowers pursuing forgiveness through the PSLF program.
• Potentially protects you from default: Enrolling in an IDR can help you realistically keep your loans and credit in good standing, and stay out of default.

Disadvantages of IDR plans

• More interest accrues: Due to its longer terms, you often pay more in interest over your loan’s lifetime, and your balance can grow significantly before you qualify for forgiveness.
• Keeps you in debt longer: Although IDR plans can be a strategic repayment option, you might be paying off your student loans for two decades or more, depending on the plan.
• Recertification required: To maintain your low payment, you must recertify your income and family size annually. 
• Forgiven amounts via IDR might get taxed after 2025: Typically, IDR forgiveness is federally taxable, but the American Rescue Plan Act temporarily halted this rule through the end of 2025. After that, tax liability on IDR-forgiven debt may be reinstated.

How to apply and stay eligible for IDR

To apply for an income-driven student loan repayment plan, submit a request online on StudentAid.gov. After inputting the required financial and personal information, you can see which plans you qualify for and compare your options. The process takes about 10 minutes or less. Your student loan servicer can also help you select a plan if you prefer to contact them directly. 

Once you’re enrolled, you must recertify your income and family size every year by the due date. However, if your income significantly drops or you need to update your family size, you can recertify early to have your payments adjusted.

Alternatives to income-driven repayment

• Extended or Graduated Repayment plans: If your income doesn’t qualify you for an IDR plan, an Extended plan can lower your payments by stretching your term to 25 years. Or opt for the Graduated plan, which sets your payments lower at first before slowly increasing your monthly payment over 10 years.
• Deferment or forbearance: For short-term relief, consider loan deferment or forbearance. These programs pause payments for a period, giving you respite from high student loan payments. However, interest continues to accrue during this time for most types of student loans.
• Federal consolidation: If keeping track of the many loans you’ve borrowed over your higher education is challenging, a Direct Consolidation Loan simplifies your debt into one new loan with one payment. Note that your rate will be the weighted average of all loans included, rounded up to the nearest one-eighth of a percent.
• Refinancing: Refinancing your student loans through a private lender could help you access competitive interest rates and a new repayment term. Keep in mind that refinancing federal loans makes you ineligible for federal programs, like loan forgiveness, IDR plans, and more.