Income driven repayment
Income-Driven Repayment (IDR)
Income-driven repayment (IDR) is a category of federal student loan repayment plans that calculate your monthly payment based on your income and family size, rather than the total amount you owe. These plans are designed to make student loan payments more manageable for borrowers whose debt is large relative to their earnings. After making payments for a set number of years, any remaining loan balance may be forgiven.
Income-driven repayment plans are available through the U.S. Department of Education and apply only to federal student loans. Private student loans do not qualify for these plans.
How It Works
Under an IDR plan, your monthly payment is typically set at a percentage of your discretionary income, which is the difference between your annual income and a portion of the federal poverty guideline for your family size. Your payment amount is recalculated each year through a process called annual recertification, during which you report your updated income and family size.
If your income is low enough, your calculated monthly payment could be as little as zero dollars, and your loans would still be considered in good standing.
Types of Income-Driven Repayment Plans
- Saving on a Valuable Education (SAVE): The newest plan, which replaced the REPAYE plan. It generally offers the lowest monthly payments of all IDR options.
- Pay As You Earn (PAYE): Caps payments at 10% of discretionary income for eligible borrowers who took out loans after a certain date.
- Income-Based Repayment (IBR): Caps payments at 10% or 15% of discretionary income depending on when you borrowed.
- Income-Contingent Repayment (ICR): The oldest IDR plan, which calculates payments at 20% of discretionary income or a fixed 12-year payment amount, whichever is lower.
Loan Forgiveness
One of the most significant features of IDR plans is loan forgiveness. Depending on the plan, borrowers who make consistent payments for 20 or 25 years may have their remaining balance forgiven. Borrowers working in public service may qualify for forgiveness even sooner through the Public Service Loan Forgiveness (PSLF) program after just 10 years of qualifying payments.
Simple Example
Suppose you have $45,000 in federal student loan debt and your annual income is $35,000. Under a standard 10-year repayment plan, your monthly payment might be around $450. However, if you enroll in an IDR plan, your payment could be reduced to roughly $100 to $150 per month based on your income and family size. You would make those lower payments for up to 20 or 25 years, and any remaining balance at the end of that period would be forgiven.
Things to Consider
- You must reapply or recertify your income every year to stay enrolled in an IDR plan.
- Lower monthly payments mean you may pay more interest over the life of the loan.
- Forgiven loan amounts may be considered taxable income in some situations.
- IDR plans only cover federal student loans, not private loans.
Income-driven repayment can be a valuable tool for borrowers who need payment relief, but it is important to weigh both the short-term benefits and the long-term costs before enrolling.