Income-Sensitive Repayment Plan: A Guide for Federal Loan Borrowers

The Federal Family Education Loan (FFEL) program was run by the Department of Education in partnership with private student loan lenders. Private lenders offered loans, including Stafford, PLUS, and Consolidation Loans, which were guaranteed by the U.S. government.

The FFEL program ended in 2010, but some borrowers are still repaying these loans. For those in repayment, the Income-Sensitive Repayment Plan is one potential option. It sets your monthly payments based on your income.

However, this payment plan may not be the best choice for everyone, so you'll need to carefully evaluate your specific situation.

What is the Income-Sensitive Repayment Plan?

Income-Sensitive Repayment (ISR) is a payment plan available to federal loan borrowers with FFEL program loans. Since the FFEL program ended in 2010, this payment plan is open only to borrowers who took out their loans well over a decade ago.

Like other income-driven repayment plans, Income-Sensitive Repayment sets your monthly payments based on a percentage of your income. You make payments on the Income-Sensitive Plan for a maximum period of just 10 years, and your payments change over time as your income changes.

Current private student loan rates

Who qualifies for the Income-Sensitive Repayment Plan?

You may qualify for Income-Sensitive Repayment if you have a low income and hold the following types of loans:

• Subsidized Federal Stafford Loans
• Unsubsidized Federal Stafford Loans
• FFEL PLUS Loans
• FFEL Consolidation Loans

Borrowers with FFEL program loans who are interested in this repayment program must reapply each year and can remain on the plan for up to 10 years.

Borrowers with Direct Loans don't qualify for the ISR Plan but can qualify for other income-driven repayment options that make student loan repayment easier.

How Income-Sensitive Repayment calculates payments

Monthly payments under the Income-Sensitive Repayment Plan are calculated based on your income. Payments can go up or down if your income changes. Lenders set the specific formulas used for the ISR Plan, but payments are typically between 4% and 25% of your monthly income.

For borrowers who make reduced payments under the ISR Plan, monthly payments during the remaining loan term may be higher to compensate for the fact that less progress was made on loan repayment during that time.

Pros and cons of the ISR Plan

There are both benefits and disadvantages to using ISR to repay student loans.

“There can be some real pros and cons to these types of repayment plans,” says Jeffrey Wood, a certified financial planner (CFP) and partner at Elysium Financial. “Lower payments can be more manageable, especially for lower-income borrowers.”

Wood also notes that adjusting payments based on income can make handling financial hardships easier and reduce the risk of default, which can damage your credit score. However, he warns that borrowers “may end up paying more in interest over time” if income-driven plans result in lower monthly payments.

“Some refer to these repayment plans as a crutch,” explains Clifford Cornell, a CFP and associate financial adviser at Bone Fide Wealth, LLC.

“While they might assist you in the short term, they can extend the duration of your total repayment plan. This would increase the amount of interest that will need to be paid,” he adds.

Alternatives to Income-Sensitive Repayment

Income-Sensitive Repayment isn't your only option for student loan repayment.

Other income driven-repayment plans

ISR is just one of several plans available to help you pay off student loans. For borrowers with newer Direct Loans instead of FFEL program loans, multiple income-driven payment plans are available.

“Income-driven payment plans allow borrowers flexibility in managing their student loans — a feature that does not exist in any other type of loan,” explains Jack Wang, a wealth adviser specializing in college financial aid at Innovative Advisory Group.

There are four income-driven repayment (IDR) plans available to Direct Loan borrowers. Each plan adjusts monthly payments at a percentage of your discretionary income, ranging from 5% to 20%, depending on the plan. IDR plans provide loan forgiveness at the end of the repayment term, unlike Income-Sensitive Repayment, and the repayment terms on these plans can last anywhere from 10 to 25 years. Borrowers on IDR plans can also qualify for Public Service Loan Forgiveness after 10 years of qualifying payments and meeting other eligibility criteria.

Borrowers with FFEL program loans must consolidate to convert their loans into Direct Loans so they become eligible for IDR plans. For many, this is a better choice than Income-Sensitive Repayment, although it can mean changes to your interest rate, and past payments may not count toward forgiveness.

Student loan refinancing

Refinancing is also an option to reduce monthly payments and total borrowing costs if you can lower your interest rate. However, most borrowers with federal loans, including Direct Loans and FFEL program loans, should not refinance, as doing so means giving up federal loan benefits.

Borrowers with existing private student loans are not eligible for IDR plans or forgiveness, so there's no downside to refinancing if it's possible to get a loan at a better rate.