Income-Driven Repayment: Which Plan Should I Choose?

Americans owe more than $1 trillion in outstanding federal student loan debt. If you're one of many borrowers looking for relief, consider an income-driven repayment plan. These plans adjust your monthly payments based on your income and family size, offering a lifeline for those struggling to repay their loans. In fact, half of all outstanding federal student debt in the U.S. is being repaid through an income-driven plan, according to a recent Government Accountability Office report. Here's what you need to know before enrolling.

How does income-driven repayment work?

Income-driven repayment (IDR) plans are designed to make student loan payments more manageable by adjusting the amount you owe each month based on your income and family size. Payments under IDR plans range from 5% (starting in July 2024) to 25% of your discretionary income, depending on the specific plan.

Unlike other federal repayment options, IDR plans offer the benefit of forgiving any remaining loan balance at the end of your repayment period - 10 to 25 years, depending on the plan. As of January 2024, more than 930,500 Americans have had a portion of their student debt canceled thanks to income-driven repayment.

Types of IDR plans

There are four income-driven repayment plans currently available:

• Saving on a Valuable Education (SAVE): The newest IDR plan sets payments at as little as 5% of discretionary income beginning July 2024 (prior to that, it's 10%). An interest subsidy ensures your balance doesn't increase if payments aren't enough to cover interest. Forgiveness is available in as little as 10 years. There's no cap on payments, so if your income is too high, payments could exceed the amount due on the Standard Repayment Plan. As of August 2024, the SAVE plan was on hold and existing participants' loans were placed into interest-free forbearance amid legal challenges expected to ultimately be resolved by the U.S. Supreme Court.
• Income-Based Repayment (IBR): Payments on IBR equal 10% of discretionary income or 15% if you first borrowed before July 1, 2014. Forgiveness is available after 20 years or 25 if you first borrowed prior to July 1, 2014. Payments are capped and won't exceed the amount due on the Standard Repayment Plan.
• Income-Contingent Repayment (ICR): Payments on ICR equal the lesser of 20% of discretionary income or the amount you'd pay on a repayment plan with a fixed payment over 12 years, adjusted to your income. Forgiveness is available after 25 years. Payments may exceed the amount due under the Standard Repayment Plan if your income is too high.
• Pay as You Earn (PAYE): Payments on PAYE equal 10% of your discretionary income, and forgiveness is available after 20 years. Payments are capped and cannot exceed the amount due under the Standard Repayment Plan. Note that the PAYE plan has been discontinued as of July 1, 2024, and no new enrollments are being accepted.

A look at SAVE, the new income-driven plan

Saving on a Valuable Education (SAVE) is the latest income-driven plan, launched in August of 2023. If you were formerly enrolled in the REPAYE Plan, you were automatically moved into SAVE.

Here are the key features of the SAVE Plan:

• Increased income exemption: SAVE uses an alternative method for calculating discretionary income, counting only household earnings above 225% of the federal poverty level instead of 150% of the federal poverty guidelines for your family size. This results in lower monthly payments. For example, single borrowers earning less than $32,800 will pay as little as $0 per month.
• Low monthly payments: As of July 2024, you'll be required to pay just 5% of discretionary income if you have only undergraduate loans. Borrowers with only grad school loans must pay 10% while borrowers with both will pay a weighted average. Most IDR plans require payments of 10% or more.
• Interest doesn't accrue: If you make your full scheduled loan payment, any remaining interest for that month is waived. This means if you keep up with your monthly payments, your loan balance won't increase due to accrued interest.
• Fastest path to forgiveness: Borrowers with original loan balances of $12,000 or less can qualify for forgiveness in as little as 10 years. One additional year of payment is required for each $1,000 in debt above $12,000. The maximum repayment period is 20 years for undergraduate-only borrowers, and 25 years if you have any debt for graduate or professional school.
• Automatic forgiveness credit: SAVE automatically credits periods of approved deferment and forbearance toward forgiveness. This includes all deferments prior to July 1, 2024, and forbearances received on or after this date.
• Consolidation won't stop forgiveness progress: Borrowers won't lose progress toward IDR forgiveness if they consolidate loans in or after July 2024.

Which IDR plan is best for me?

To qualify for an income-driven plan, you need to have eligible federal student loans that are not in default. Since monthly payments are based on income and family size, most people with debt that exceeds their income or whose payments represent a large portion of their income will qualify.

What to consider before enrolling in IDR

While IDR plans can lower your monthly payments, they often extend your repayment term beyond the standard 10-year repayment period. As a result, you might stay in debt for longer and accrue more interest over the life of your loan.

You should also note that payments made on the SAVE and ICR plans may exceed what you'd pay on the 10-year Standard Repayment Plan if your income rises above a certain threshold. The best way to estimate your payments under an income-driven repayment plan is to use the loan simulator available from the U.S. Department of Education.

How to apply for an IDR plan

To enroll in an income-driven repayment plan, follow these steps:

1. Sign in to your Federal Student Aid Account.
2. Complete an Income-Driven Repayment Plan Request. Be prepared to answer questions about your employment, marital status, and family size.
3. Provide proof of income. You can authorize the IRS to release your tax returns to satisfy this requirement.
4. Select an IDR plan you're eligible for that offers the lowest monthly payment and works best for you.

You can also download a copy of the IDR enrollment form from the Department of Education's forms library and fax or mail the request to your loan servicer.

Recertify annually to stay on track for forgiveness

IDR plans must be recertified annually. You can provide consent for automatic recertification if you have at least one federal student loan that's not in default and you have no active FFEL program loans. If you don't sign up for automatic recertification, you'll need to recertify manually by submitting another IDR application. Your loan servicer should notify you at least three months before the recertification deadline.

Recertification ensures you pay the correct amount based on income and family status. If you fail to recertify by the deadline, you'll be placed back on a different plan, which may cause your monthly payments to increase.

Once you've made your final qualifying payment, any remaining balance on your student loans is eligible for forgiveness.

Is income-driven repayment right for me?

An IDR plan can be financially wise if you make a limited income and don't expect your earnings to increase substantially while you're in repayment. Consider switching to an income-driven plan if:

• You can't afford your monthly student loan payments and you're at risk of default.
• You have high student loan debt relative to your income.
• You're unemployed or your income has recently dropped.