What is an income-driven repayment plan and how do you qualify for one?

Income-driven repayment plans, or IDRs, make it easier to repay federal student loans, adjusting monthly payments based on your income. (Shutterstock)

Student loans are a popular financial resource when it comes to paying for undergraduate and graduate educational expenses. But repaying that debt can be an arduous process, with monthly payments that don’t always feel affordable.

If you have federal student loans, income-driven repayment plans can make student loan repayment easier, especially if you’re struggling to make scheduled payments. Here’s a look at how income-driven repayment plans work, who can take advantage of them, and why you might want to consider one.

If you’re considering refinancing your student loans instead, Credible lets you easily compare student loan refinance rates.

• What is an income-driven repayment plan?
• What are the different types of income-driven repayment plans?
• How do you apply for an income-driven repayment plan?
• Pros and cons of income-driven repayment plans
• Alternatives to income-driven repayment plans

What is an income-driven repayment plan?

An income-driven repayment (IDR) plan is used to calculate your monthly payment obligation on your outstanding federal student loan debt. 

IDR plans are intended to make federal student loan payments more affordable for borrowers. These plans take into account both your household/family size and discretionary income when calculating a monthly IDR obligation.

Income-driven repayment plans are available to you as a federal student loan borrower, as long as the loans in question aren’t in default. Unfortunately, these plans aren’t offered to private student loan borrowers.

What are the different types of income-driven repayment plans?

You can choose from four different types of income-driven repayment plans, depending on the type of federal student loan(s) you hold. 

Here’s a look at each plan type, the payment amounts they offer, and who’s eligible for them.

Income-Based Repayment (IBR)

In order to qualify for an Income-Based Repayment or IBR Plan, your income needs to be low enough that your IBR payment is lower than it would be with the 10-year Standard Repayment Plan. You may meet this requirement if your federal student loans are more than (or a notable percentage of) your annual discretionary income.

The IBR Plan is also only offered to new borrowers. A new borrower is a borrower who received disbursement of a Direct Loan on or after Oct. 1, 2011, and had no outstanding Direct Loan Program or FFEL Program loan balance when receiving either type of loan on or after Oct. 1, 2007.

An IBR Plan is typically based on the family size and discretionary income that you have at the time you begin making payments. But if your income changes, it can be recertified.

• If your income drops — If a decrease in income qualifies you for an IBR Plan below the monthly amount you’d be expected to pay with a Standard Repayment Plan, it can be recalculated and lowered.
• If your income increases — Your monthly payment may be recalculated and raised, up to the standard 10-year payment amount. If your income increases so much that your IBR Plan payment would be more than the Standard Repayment Plan, you’ll be disqualified from Income-Based Repayment and your payment will be the same as the 10-year Standard Repayment Plan amount (never more).

If your income is low enough, your payment under an IBR Plan could be as low as $0. But new borrowers (as of July 1, 2014, and after) will typically pay a monthly payment equal to 10% of their discretionary income. For borrowers who aren’t new as of that date, an IBR Plan of 15% is typical. But your payment will never be higher than the 10-year Standard Repayment Plan amount.

If you qualify as a new borrower on or after July 1, 2014, your IBR Plan repayment term will be 20 years. If you’re not a new borrower on or after that date, your IBR Plan term is 25 years.

Income-Contingent Repayment (ICR)

The ICR Plan, or Income-Contingent Repayment Plan, is available to eligible federal student loan borrowers, as with the IBR plan, but the difference is that an ICR Plan is always based on income. If your income increases over time, the payment amount can also increase — even if that means a monthly payment that’s higher than the 10-year Standard Repayment Plan amount.

The repayment term for an ICR Plan is 25 years. You can typically expect your monthly payment amount to be the lesser of either 20% of your discretionary income, or the fixed payment amount on a 12-year income-adjusted repayment plan.

An ICR Plan is the only income-based option available to Parent PLUS Loan borrowers, but it isn’t offered directly. To take advantage of this option, Parent PLUS borrowers need to consolidate their loans into a Direct Consolidation Loan, then certify for an ICR Plan. 

Pay As You Earn (PAYE)

The Pay As You Earn, or PAYE, Plan has the same eligibility requirements as IBR plans: 

• Your monthly payment amount needs to be lower than it would be with a 10-year Standard Repayment Plan.
• You also need to be a new borrower, with disbursement of a Direct Loan on or after Oct. 1, 2011, and no outstanding Direct Loan or FFEL Loan balance when receiving either type of loan on or after Oct. 1, 2007.

With a PAYE Plan, your repayment term will be 20 years. Though the repayment amount is based on discretionary income and household size, this generally equates to 10% of your income. But the PAYE Plan repayment amount will never exceed your 10-year Standard Repayment Plan amount.

Revised Pay As You Earn Repayment (REPAYE)

The fourth option is the Revised Pay As You Earn Repayment Plan, or REPAYE, which is available to all borrowers with eligible federal student loans. This income-driven plan generally results in a payment equal to 10% of your discretionary income, but it’s always income-based. This means that if your income increases while under this plan, your monthly payment can also increase — even if that results in a payment greater than the 10-year Standard Repayment Plan amount.

With a REPAYE Plan, you’ll follow the plan for 20 years if repaying undergraduate loans, or 25 years for graduate or professional student loan debt.

If an IDR plan isn’t right for you, Credible lets you compare student loan refinance rates without affecting your credit.

How do you apply for an income-driven repayment plan?

In order to apply for an income-driven repayment plan, you’ll need to contact your federal student loan servicer. They’ll guide you through the process and let you know whether or not you qualify for one of the four plans.

You’ll start by filling out an Income-Driven Repayment Plan Request, either online or in paper form. On this form, you’ll either choose the IDR plan you want or opt to allow your loan servicer to choose the one that suits you best, based on your situation and the lowest possible payment amount.

If you have more than one federal loan servicer, you’ll need to fill out an application for each servicer whose loans you want included in an IDR plan.

You’ll need to provide your servicer with some documentation and information, helping them determine your eligibility for an IDR plan and calculate your required payment amount. This may include providing your adjusted gross income or other proof of income, such as previous federal income tax returns.

What is recertification?

Each year, you’ll be expected to recertify your IDR plan. This means updating or confirming your income and family size so that your servicer can renew your eligibility. If you fail to submit the required information for recertification by the deadline, you may face consequences depending on your plan. 

• REPAYE Plan participants — Failure to recertify will result in being removed from the plan altogether. You’ll be placed in an alternate repayment plan automatically, requiring you to pay your loan(s) in full by the earlier of 10 years or your originally scheduled REPAYE Plan end date. But you can choose to leave that alternate plan and repay under any other repayment plan you’re eligible for.
• IBR, ICR, and PAYE Plan participants — Failing to recertify won’t result in your removal from the plan, but it will mean that your payment is no longer income-based. Instead, your monthly student loan payments will switch to the 10-year Standard Repayment Plan amount for which your loans are eligible.

If you update your information with your servicer later, you may be able to return to your original IDR plan payment amount.

It’s important to note that if you fail to recertify your IBR, PAYE, or REPAYE Plans by the deadline each year, you’ll be responsible for repaying any unpaid interest. This interest will be added to the remaining principal balance of your loan, which will continue to accrue additional interest charges over time.

Pros and cons of income-driven repayment plans

If you have federal student loans, you’ll want to consider some pros and cons of income-driven repayment plans before you apply for one: 

Pros of income-driven repayment plans

• They may reduce your monthly payments. If your income and family size qualify you for an income-driven repayment plan, your monthly payment requirement may be less than with a 10-year Standard Repayment Plan.
• Remaining balances can be forgiven. Each IDR plan has a maximum repayment term. At the end of that term, any remaining federal student loan balance may be forgiven.
• You may be able to avoid default. If you’re struggling to keep up with loan payments, an IDR plan may help you avoid defaulting on your loans. Rather than put your loans into forbearance or deferment, an IDR plan can establish a monthly payment that’s proportionate to your discretionary income and likely to be more manageable.

Cons of income-driven repayment plans

• You have to qualify. In order to qualify for an IDR plan, you’ll need to be a federal student loan borrower; private loans aren’t eligible. Additionally, your family size and income will be used to determine whether or not an IDR plan is an option for your loan repayment.
• You could be in debt longer. The standard federal student loan repayment term is 10 years, while some income-driven repayment plans stretch this to as many as 25 years. This could mean that you remain in debt for far longer than you would have originally.
• Even if your remaining debt is forgiven, you could have a hefty tax bill. If you reach the end of your IDR plan term and have a remaining balance, it could be forgiven — but that doesn’t mean you’re free and clear. Any forgiven balance is subject to federal taxes, which could result in a hefty tax bill from the IRS.

Alternatives to income-driven repayment plans

If you don’t qualify for an income-driven repayment plan, consider these alternatives:

• Extended Repayment Plan — With an Extended Repayment Plan, your federal student loan repayment term is stretched for up to 25 years. This means lower payments and a longer time to satisfy the debt.
• Direct Consolidation Loan — With a Direct Consolidation Loan, you can combine multiple federal loans into a single loan balance. Your new interest rate will be a weighted average of the rates on your existing loans, so you won’t necessarily receive a lower rate. But consolidating your federal loans into a single Direct Consolidation Loan will simplify the repayment process, resulting in just one interest rate and one monthly payment to track.
• Deferment or forbearance — For federal student loan borrowers with a short-term financial strain, deferment or forbearance can be a temporary option. These allow you to pause your payments for a period of time, though interest will likely continue to accrue and your balance may increase.
• Refinance into a private student loan — Refinancing student loans can be a great way to consolidate multiple accounts, lower interest rates, get out of debt sooner, reduce monthly payments, or all of the above. You can refinance private student loans, federal student loans, or a combination of both with a private lender. But it’s important to note that refinancing federal student loans into a private loan will cause you to lose access to certain federal benefits, such as IDR plans, Public Service Loan Forgiveness (PSLF), deferment, and forbearance.

With Credible, you can easily compare student loan refinance rates from various lenders in minutes.

Repaying student loan debt can be uncomfortable for many borrowers. But if you have a significant federal student debt burden — especially compared to your discretionary income — an income-driven repayment plan can make it easier and more affordable to satisfy those loan balances.