Does the amount you earn on a yearly basis pale in comparison to your monthly student loan payments? Do you have federal student loans? If the answer is “yes” to both of these, then you might benefit from a student loan repayment plan. These income-driven plans include:
- Income-Based Repayment (IBR) plans
- Income-Contingent Repayment (ICR) plans
- Pay As You Earn (PAYE) repayment plans
- Revised Pay As You Earn (REPAYE) repayment plans
Income-driven repayment plans can reduce your monthly payment amount — sometimes dramatically — because they cap that payment at a (hopefully) affordable level, based on your income and family size. Your payment adjusts annually according to these factors.
Specifically, the amount you pay is calculated as a percentage of your discretionary income. According to the Federal Student Aid office, for IBR and PAYE, discretionary income is the difference between your income and 150% of the poverty guideline for your family size and state of residence. For ICR, it’s the difference between your income and 100% of the poverty guideline. (You can look up the poverty guidelines used to determine eligibility for some federal programs, if you want more information.)
A great benefit of these plans is that each has a maximum length — usually 20 or 25 years — after which all remaining loan balances are forgiven. Note, however, that you will generally be taxed on the amount that gets wiped away.
Want to find out how to apply for an income-driven repayment plan? Read on for information on how the process works.
Getting started with income-driven repayment plans
Generally, if you want to set up your student loan account on an income-driven repayment plan, your best bet is to first contact your student loan servicer. (Not sure which loan servicer you have? You can check on the National Student Loan Data System website.)
If you log into your account online, you should see a section for changing your repayment plan. At the least, your servicer should address the issue in an FAQ section of its site.
It’s your loan servicer’s job to help you find the best 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.
How to apply for income-driven student loan repayment
The application process is very 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 ask your loan servicer to choose the plan with the lowest monthly payment amount.
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.
Additionally, if you have federal loans with multiple loan servicers, you must request income-driven repayment for each loan 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 that 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:
Income-Based Repayment plan overview
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 plan overview
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 plan overview
REPAYE is a fairly 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.
Income-Contingent Repayment plan overview
Your monthly payment under the ICR plan is the lesser of these two options: 20% 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.
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 to get its input. 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, so be careful to 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 solution will be the one that saves you the most money while also fitting with your own financial goals.