Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
Updated on Wednesday, April 28, 2021
Finding the best student loan repayment plan all depends on your finances and debt payoff goals. If you’re struggling to make your federal student loan payments each month, you might benefit from applying for an income-driven repayment plan. These income-driven plans include:
- Income-Based Repayment (IBR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Income-Contingent Repayment (ICR)
Income-driven repayment plans can reduce your monthly payment amount — sometimes dramatically — because they cap that payment based on your discretionary income and family size. Your payment adjusts annually according to these factors.
Each of these plans has a maximum length, usually 20 or 25 years, after which any remaining loan balance is forgiven. Note that you would generally be taxed on the amount that gets wiped away, although recent government action has suspended any taxes for forgiven federal student loans until 2025.
Want to find out how to apply for an income-driven repayment plan? Read on to learn how the process works.
Choosing the best student loan repayment plan for lowering your monthly payments
Generally, if you want to set up your student loan account on an income-driven repayment plan, your best bet is to contact your student loan servicer. (Not sure which loan servicer you have? You can check by signing into your account on the Federal Student Aid website.)
It’s your loan servicer’s job to help you find the best student loan repayment plan for your situation, but you need to contact it as soon as you start having difficulty in making payments. You don’t want to miss any payments and end up delinquent (or worse, in default) because you couldn’t pay. Plus, loans that are in default aren’t eligible for income-driven repayment plans.
That said, loan servicers don’t always give the best guidance, so it’s also a good idea to research the plans on your own. By exploring the details of each one, you can find the best student loan repayment plan for you.
What’s more, private student loans are not eligible for federal income-driven plans. If you’re having trouble paying back your private loans, contact your student loan servicer to find out if it can offer you any relief.
How to apply for income-driven student loan repayment
The application process is simple and straightforward. The first step is to fill out the Income-Driven Repayment Plan Request form. This can be done online, or you can apply with a paper application supplied by your student loan servicer.
When you make your request, you have to choose the specific plan you’d like to go with. You can select one yourself, or you can request the plan with the lowest monthly payment.
Provide proof of income
Since you’re applying for a repayment plan based on your taxable income, you will need to provide proof of income. The easiest way is to use your most recent tax return, as long as your income hasn’t changed significantly from the date you filed. You will also need to have filed a federal income tax return for the past two years.
The online application makes it easy to find your adjusted gross income (AGI) — you can use the IRS Data Retrieval Tool to import your income information. If you apply with a paper application, you’ll need to supply a paper copy of your most recent federal tax return or an IRS tax return transcript.
If your income has changed a lot since you last filed, or if you haven’t filed two federal tax returns yet, there are other ways of proving your income.
First, if you don’t have any source of income at all, you just need to indicate that on your application. Only taxable income counts. So if you receive any government assistance or any other income that’s not considered taxable, you don’t need to report it here.
If you do earn an income, you’ll need to provide your most recent pay stubs or other alternative documentation that shows how much you make.
Have multiple loan servicers? Apply with each individually
If you have federal loans with multiple loan servicers, you must request income-driven repayment with each individually. There’s a section of the application that asks if you have eligible loans with more than one servicer, so you can indicate that there.
The application itself shouldn’t take long to complete, but the entire process can take a few weeks, depending on which loan servicer you have.
If you have an immediate need to lessen your payments, your loan servicer may apply a forbearance to your federal loans while the process wraps up. That’s why it’s important to contact your servicer as soon as you realize you can’t make your payments.
You have to reapply annually
You’ll be required to submit your proof of income on an annual basis after you apply the first time. As your income changes, so does your payment, so you need to provide this information continuously. However, there’s no income limit for income-driven repayment plans.
If you start earning more and you’re on an IBR or PAYE plan, your payment amount is capped at the amount you’d be paying under the standard 10-year repayment plan. It will never exceed that amount. Technically, your loans will still be under your chosen income-driven repayment plan, but your monthly payment is no longer based on your income. You can still have your outstanding loan balance forgiven after your repayment term ends (if you don’t pay your loan off before then).
For ICR plans, your payment amount could fluctuate between the lesser of 20% of your discretionary income and what your monthly payment would be if you had a 12-year fixed plan. On a REPAYE plan, your monthly payment is simply 10% of your discretionary income.
Whose income is taken into consideration?
If you’re married and wondering if your spouse’s income will be taken into consideration, it depends on how you file your federal taxes.
Filing separately means only your income and loans will matter (unless you’re on a REPAYE plan, which considers both incomes, regardless of how you file).
Filing jointly means your monthly payment will be based off of your joint income. If you and your spouse file jointly and you both have eligible federal student loans, all of them will be taken into consideration, but your spouse doesn’t have to enter into an income-driven repayment plan for you to join.
Meet the income-driven repayment plans
Now, let’s take a look at each major plan type and some of their respective details:
You don’t qualify for IBR unless your payment amount would be less than what you’re paying under the standard 10-year repayment plan.
A good way to estimate whether you’ll qualify is to check if your total student loan debt is higher than (or makes up a significant portion of) your annual discretionary income, which would reduce your monthly payment under IBR.
If your debt-to-income ratio — how much student loans and other debt you have relative to your income — is high, you may qualify for this option. You can calculate your DTI in a few simple steps using information about your monthly income, debts and payments.
Borrowers who got their first student loans after July 1, 2014 have a maximum term of 20 years under IBR plans, while borrowers who had loan balances before July 1, 2014 have a maximum 25-year term. Anything left after those terms expire will be forgiven.
Pay As You Earn
For PAYE, your monthly payment will be about 10% of your discretionary income, and never more than what you’re paying under the standard 10-year payment plan.
You have a maximum of 20 years to pay back your loans under this plan, after which your balance is forgiven.
The qualifications for PAYE are the same as IBR — you must be paying less under PAYE than you were under the standard 10-year plan.
However, PAYE is only available to those who were new, first-time borrowers as of Oct. 1, 2007, and who received a disbursement in the form of a direct loan on or after Oct. 1, 2011.
Revised Pay As You Earn
REPAYE is a relatively recent addition to the income-driven repayment plan menu. It’s similar to PAYE in many ways but distinct in a few key ones.
For example, unlike with PAYE, REPAYE is available to any borrower, regardless of when you received your first federal student loan. And, if you’re married, your spouse’s income will be considered in calculating your monthly payment, no matter how you file your taxes.
Under this plan, your monthly payment is 10% of your discretionary income, and you must repay your loans for 20 years if they were used for undergraduate studies (or 25 years if you took out loans for graduate or professional studies) before they are forgiven.
Your monthly payment under the ICR plan is the lesser of these two options: Twenty percent of your discretionary income, or the amount you would pay on a 12-year fixed repayment plan, adjusted according to your income.
Under this plan, your term is 25 years before you can receive forgiveness. There are no initial guidelines you must qualify under — anyone can choose this plan to repay their student loans.
ICR is the only income-driven plan available for parent loans, and only if those loans are consolidated first.
Benefits of income-driven repayment plans
As mentioned, the big bonus for all four of these repayment plans is that your outstanding balance is forgiven after your repayment term is complete. Also, if you qualify for forgiveness after 10 years through the Public Service Loan Forgiveness program, that takes precedence.
IBR, PAYE and REPAYE have an extra perk if you took out a subsidized student loan: If your monthly payment isn’t enough to cover any interest that accrues monthly on your subsidized loan, the government will pay the difference for the first three years.
For REPAYE plans, the government will also pay half of the difference on your unsubsidized loan and continue to cover half of the difference after three years on your subsidized loan.
You can use MagnifyMoney’s student loan calculators to see which plans could offer you the lowest monthly payment. Income-driven plans aren’t guaranteed to give you the lowest possible payment — all situations are different. And don’t forget that there are other repayment plans that aren’t reliant upon your income but can still lower your monthly payment, such as the graduated and extended repayment plans.
Check with your loan servicer first
Before applying for an income-driven repayment plan, it’s best to check with your loan servicer for advice. You don’t want to end up owing more per month than you do now. These repayment plans are designed to help you, not hurt you.
You may find that forbearance or deferment is a better option, especially if you’re only experiencing a temporary economic hardship. Note that both forbearance and deferment can result in interest piling up, carefully examine all your options before you decide.
And while it’s crucial to check with your servicer, remember that this is your decision, and you don’t have to follow your servicer’s advice. The best student loan repayment plan will be the one that fits with your own financial goals.
Rebecca Safier contributed to this report.