What is an Income-Driven Repayment Plan?

If you’re a recent college grad and living on your own, you’re probably familiar – maybe too familiar – with how much of your budget student loan repayments can take up. One way to lighten the load is through an income-driven repayment plan. If you’re eligible, these plans let you restructure your monthly payments as a percentage of your income, often reducing how much you owe every month. 

There are several income-driven repayment plans available, and eligibility requirements can be strict. If you think an income-driven repayment plan might be right for you, here’s what you need to know to get started.

An income-driven repayment plan lets you reduce your monthly federal student loan payment to a percentage – usually 10–20% – of your discretionary income. Any remaining loan balance is forgiven after you’ve made the equivalent of 20 to 25 years of qualifying payments, depending on the plan.¹ This differs from Public Service Loan Forgiveness plans, which forgive your remaining balance after 10 years of qualifying payments. 

Income-driven repayment plans can only be used for federal loans. If you consolidated your federal loans into a private loan, you will not be eligible for an income-driven repayment plan. But you could be eligible if you consolidated your federal loans into a federal Direct Consolidation Loan.

By default, about six months after graduating or leaving school your student loans will be set to a standard 10-year repayment plan, and you’ll be asked to start paying every month. But if you don’t think you’ll be able to comfortably afford the fixed monthly payment, you might be able to apply for an income-driven repayment plan.  

There are three main steps to apply: 

Step 1: Figure out which repayment plan is best for you. There are four income-driven repayment plans: Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). Each have different specifications, loan terms, and eligibility requirements. Eligibility is based on your income, loan balance, the date you took out your loans, and the type of federal student loans you have. Understanding each plan can be complicated, but your federal loan servicer should be able to help you choose the right plan, free of charge.² The chart below can start you on the road to finding out whether you’re eligible for one or more of the plans.

Key Attributes of Income-Driven Student Loan Repayment Plans

Source: Federal Student Aid

Step 2: Fill out an application. When you find the right plan, you can apply online for free. You’ll need some personal information, like your verified Federal Student Aid (FSA) ID, address, contact information, adjusted gross income, and more.³

Step 3: Receive your monthly payment information. If approved, your monthly payments will be based on a percentage of your discretionary income. But be aware, in this case discretionary is based on a specific formula – it is not up for discussion. To understand other definitions of discretionary income, read “What is Discretionary Income?” For the purposes of income-driven repayment plans, discretionary income is defined as the difference between your adjusted gross income and 1.5 times the federal poverty benchmark income level for your family size and state.⁴ The calculation – and your monthly payment amount – might differ depending on your repayment plan and your specific financial circumstances. For example, under certain plans, your income includes your and your spouse’s income, if you’re married. Your spouse’s federal student loan debt, if any, might be considered, too.

If you’re on an income-driven repayment plan, you’ll have to reapply every year. Why? To account for any potential changes to your income and family situation. If your income rises, for instance – and depending on the plan you’re on – it’s possible your monthly payment amount can exceed what you would have been paying under the standard 10-year repayment plan. If you forget to recertify your income, your monthly payments will revert back to the standard repayment plan.

After a set period of time – 20 or 25 years, depending on the plan and/or your status as undergraduate or graduate/professional student – any remaining loan balance will be forgiven.⁵  But you’ll owe income tax on whatever amount is forgiven. 

If you’re on an income-driven repayment plan and are also on a Public Service Loan Forgiveness (PSLF) plan, your remaining balance can be forgiven after only 10 years of qualifying payments. Take note: qualifications can be strict. Unlike standard IDR plan forgiveness, PSLF forgiveness is not taxed. To learn more, read “What is Student Loan Debt Forgiveness.”