How to Lower Student Loan Payments with Income-Driven Repayment Plans


How to Lower Student Loan Payments with Income-Driven Repayment Plans

Student loan debt is a huge burden for millions of Americans. The average student loan debt for graduates is over $30,000. With the rising costs of living, many borrowers struggle to make their monthly payments. Luckily, there are options to lower your student loan payments through income-driven repayment plans.

What are income-driven repayment plans?

Income-driven repayment (IDR) plans allow you to pay a percentage of your discretionary income toward your federal student loans each month. Your payment is recalculated each year based on your updated income and family size. There are four main types of IDR plans:

  • Income-Based Repayment (IBR): Payments are 10% of discretionary income. Forgiveness after 20 years (undergraduate loans) or 25 years (graduate loans).
  • Pay As You Earn (PAYE): Payments are 10% of discretionary income. Forgiveness after 20 years.
  • Revised Pay As You Earn (REPAYE): Payments are 10% of discretionary income. Forgiveness after 20 years (undergraduate loans) or 25 years (graduate loans).
  • Income-Contingent Repayment (ICR): Payments are the lesser of 20% of discretionary income or what you would pay on a 12-year fixed plan. Forgiveness after 25 years.

These plans are designed to be affordable based on your income and family size. They provide payment relief and the possibility of loan forgiveness.

Benefits of income-driven repayment plans

There are many benefits to using an IDR plan to repay your federal student loans:

  • Lower monthly payments: Your payment will be based on your income, so it will likely be lower than the standard 10-year repayment plan. This helps free up cash flow each month.
  • Possibility of loan forgiveness: If you haven’t fully repaid your loans after 20-25 years of qualifying payments, the remainder will be forgiven.
  • Interest subsidy on subsidized loans: On subsidized loans, the government pays your unpaid interest for the first 3 years on most IDR plans. This prevents balances from growing.
  • Flexible payments: Your payment adjusts each year based on your updated income and family size. Payments go down if your income decreases.
  • Covers multiple loan types: IDR plans can cover Direct Loans, FFEL Loans, Perkins Loans, and more. Consolidation may be required.
  • Works during hardship: If you’re unemployed or facing financial hardship, you can apply for $0 monthly payments until your situation improves.

IDR plans provide breathing room when you need it most. Lower payments help you avoid delinquency and default.

Who qualifies for income-driven repayment?

To qualify for an IDR plan, you must have eligible federal student loans. This includes:

  • Direct Subsidized and Unsubsidized Loans
  • Direct PLUS Loans made to students
  • Direct Consolidation Loans
  • Subsidized and Unsubsidized Federal Stafford Loans
  • Federal Perkins Loans
  • FFEL Program loans

Private student loans are not eligible. However, you can consolidate eligible federal loans into a Direct Consolidation Loan to qualify.In addition, you must pass a partial financial hardship test. This determines whether the IDR payment amount will be less than the 10-year standard plan amount. Most borrowers pass this test easily.You’ll need to submit documentation of your income and certify your family size annually to stay on an IDR plan.

How to apply for income-driven repayment

Follow these steps to get started with an income-driven repayment plan:

  1. Determine the best IDR plan for you. Use the Federal Student Aid IDR Plan Comparison tool to see plans side-by-side. Consider factors like your debt-to-income ratio, career trajectory, and loan forgiveness needs.
  2. Complete the IDR plan application. You can apply online at or submit a paper application. You’ll need income documentation like tax returns.
  3. Submit proof of income annually. To stay on an IDR plan, you must recertify your income and family size each year. The servicer will send reminders.
  4. Look into consolidation. If needed, consolidate federal loans via the Direct Consolidation Loan Application to qualify for IDR.
  5. Enroll in auto-debit. Set up automatic monthly payments from your bank account to earn an interest rate reduction of 0.25%.
  6. Review annually. Check each year that your payment amount still fits your budget. You can switch between IDR plans as needed.

The SAVE Repayment Plan is a new IDR plan that will replace REPAYE starting July 2024. It offers lower monthly payments and an end to interest growth after borrowers have paid principal and interest equal to the original loan amount. Consider opting into SAVE as soon as it launches.

Income-driven repayment example

Let’s look at an example to see IDR in action:Sarah owes $32,000 in federal student loans and makes $45,000 per year. On the standard 10-year plan, her monthly payment would be around $320.Under the REPAYE plan, Sarah’s payment would be just $150 per month. Here is how it’s calculated:

  • Sarah’s discretionary income is $45,000 minus 150% of the poverty line for a family of one ($19,320) = $25,680
  • 10% of her discretionary income is $256.80. But since her total loan balance is lower than this amount, her payment is capped at the total balance divided by 12 months = $150

This IDR payment saves Sarah $170 per month compared to the standard plan. That’s $2,040 in annual savings she can put towards other goals.

Finding resources and help

Navigating student loan repayment can be complicated. Here are some resources if you need help understanding or applying for income-driven repayment:

Don’t struggle alone – reach out for help lowering your payments. With an income-driven repayment plan, you can ease your student debt burden.

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