|% of Discretionary Income||Loan Forgiveness|
|REPAYE||10%||20 — 25 years|
|Income Based Repayment||15%||20 — 25 years|
|Income Contingent Repayment||20%||25 years|
Income-Based Repayment #
Income-based repayment or income-driven repayment is a student loan repayment program that helps lower the amount you must pay each month on your federal student loans. This helps make it easier for you to keep up with payments.
Income-Based Repayment, or IBR, is one of four such plans known collectively as income-driven repayment plans, which allows for monthly repayments based on your income level.
It does this by capping the monthly payments at 15% based on your monthly discretionary income, not the total amount borrowed — and any remaining debt will be forgiven after 20 years or 10 years if you’re in public service. 2
For many eligible new borrowers — those who received loans on or after July 1, 2014, your monthly payment amount will be no more than 10% of your income.
Using a sliding formula, IBR calculates how much you can afford to pay on your loans and guarantees that your repayments will never be larger than they would be under the default 10-year plan, which can be as low as zero dollar.
This plan works best for borrowers who are experiencing financial difficulty, and those who have a high debt level compared to their income.
Pay-As-You-Earn (PAYE) #
An improved version of the Income-Based Repayment plan — known as the “Pay-As-You-Earn” (PAYE) went into effect in December 2012. Like IBR, PAYE requires proof of financial hardship.
Income-Based Repayment and PAYE are nearly identical. The biggest difference between the two plans is that PAYE limits the amount of interest that can be capitalized, or added to your balance; IBR does not.
This makes PAYE a better option if you’re eligible but harder to qualify.
The catch with “Pay-As-You-Earn” plan is that it doesn’t apply to every borrower. To qualify, you must be a new borrower on or after October 1, 2007, and you must have had received a direct loan disbursement on or after October 1, 2011.
Furthermore, PAYE plan offers a 3-year period where the government will pay accrued interest for subsidized loans and cover half of the accruing interest for both subsidized and unsubsidized loans thereafter.
Revised Pay-As-You-Earn (REPAYE) #
REPAYE is the revised version of the existing Pay As You Earn (PAYE) plan, that is designed for borrowers who don’t qualify for PAYE due to income or date restriction.
REPAYE limits your monthly payments to 10% of your discretionary income and forgives your remaining loan balance after 20 years of payments or 25 years if you borrowed federal loans for graduate or professional school.
This plan is similar to PAYE with a few differences. The most notable difference is there is no cap on payments.
Although it’s possible to qualify for a monthly payment of $0, your monthly payment under REPAYE can be more than what you pay under the Standard 10-year Plan, allowing you to pay off your debt faster if you choose so.
Unlike IBR / PAYE, REPAYE doesn’t require proof of a partial financial hardship. All federal direct loan borrowers are eligible, except those with Parent PLUS loans.
If you have parent loans, you can only use income-contingent repayment.
Income Contingent Repayment (ICR) #
Income Contingent Repayment (ICR) plan is available for all borrowers with the exception of Parent PLUS loans which must first be converted into federal direct consolidation loans.
Payments are calculated each year and are based on your income, family size, and total amount borrowed but will usually be higher than payments under the IBR and Pay As You Earn plans.
The payment is capped at 20% of monthly discretionary income for a period of up to 25 years or fixed payments over a 12-year term — whichever is less.
Similarly, ICR forgives your remaining balance after 25 years of payments.
For ICR, discretionary income is defined as the difference between your annual income and 100% of the poverty guidelines for your family size and state of residence.
Who qualifies for income-based repayment? #
To get into either PAYE or IBR, you need to demonstrate at least a partial financial hardship. That is, your disposable income does not exceed 150% of the state poverty level for a family of your size.
Once your income increases, your loan payment will be capped at 10% of whatever your income is.
In the event your income increases to the point where you no longer have a partial financial hardship, your monthly payment will scale to the amount you would pay under a 10-year Standard Repayment Plan.
To determine whether or not you qualify for income-based repayment plans, check out the Loan Simulator created by the U.S. Department of Education.
If your income doesn’t qualify you for an income-based repayment plan, you may consider student loan refinancing. It can lower your monthly payments and decrease the amount of interest you pay.
What types of federal student loans can I repay under an income-driven repayment plan? #
Both “subsidized” and “unsubsidized” loans, Direct PLUS Loans made to students and consolidation loans that do not include loans made to parents are eligible for IBR / PAYE.
Parent PLUS Loans, loans that are in default, consolidation loans that repaid Parent PLUS Loans and Perkins Loans are not eligible.
Private student loans do not offer income-based repayment plans. If you can’t make your private student loan payments, you might be able to negotiate a deferment or revised payment schedule with your lender.
Is PAYE or REPAYE better? #
For the most part, PAYE and REPAYE are pretty similar. Both use 10% of your discretionary income. And both forgive some or all of your loans after 20 years of payments.
If you are one of those high income earners (doctors, lawyers, etc.), you will pay more under REPAYE plan than you would under the PAYE plan. That’s because REPAYE has no cap. If that’s the case, PAYE may be your best option.
However, if you have a smaller amount of debt and your main focus is on getting the lowest possible payments, REPAYE could be the right choice.
How do I apply for IBR / PAYE / REPAYE? #
- Sign in to StudentLoans.gov using your FSA ID and submit an application called the Income-Driven Repayment Plan Request. Create an FSA ID if you don’t have one yet.
- You’ll be asked to choose which income-driven repayment plan you want to sign up for.
If you are unsure which repayment plan is best for you, you may choose to have your loan servicer put you on the plan with the lowest monthly payment you qualify for.
Keep in mind that if you opt for IBR or PAYE, you must continue displaying a partial financial hardship when you “recertify” your income and family size every year.
Is income-based repayment a good idea? #
Both Income-Based Repayment and “Pay-As-You-Earn / REPAYE” plans help lower your monthly student loan payment by hundreds of dollars but these lower payments may result in a longer repayment period and additional accrued interest.
In other words, if you do the math, these income-based plans could potentially end up costing you far more than you save under other repayment plans.
There is also an annual paperwork requirement. You must recertify your income and family size every year. If you miss the deadline, your loans will be placed in the standard repayment plan.
However, in times of hardship, it’s almost better to stretch out the loan, or opt for student loan refinancing, than being in default. If you qualify for a lower rate, refinancing can be a smart strategy.
- Federal Student Aid, FACT SHEET: Income-Driven Repayment Plans
- A new public service loan forgiveness program will discharge the remaining debt after 10 years of full-time employment in public service