How to Apply to an Income-Driven Federal Student Loan Repayment Plan

Renee Layberry
May 4, 2021

Graduating college feels a lot like you just conquered the world. But then the first student loan payment comes due, and you might be left wondering how in the world you are going to manage that monthly bill along with all your other expenses.    Factor in the reality that your first job out of college may not pay much at first. In fact, your career in teaching or public service may never offer a high enough salary on which to comfortably live without possibly defaulting and trashing your credit score.   Even if you graduated years ago, you may find that your loan repayments are keeping you from saving money for a house, your kids’ college education, or your retirement. And you may be especially hard hit if you’ve recently lost your job.   There’s good news, though.   If you have federal school loans, you may qualify for an income-driven repayment (IDR) plan. IDRs are government-subsidized repayment plans that allow you to pay based on your income. That translates into lower payments for you.    IDRs also offer loan forgiveness after a set number of years (usually between 20 and 25). At the end of that period, any remaining debt will be forgiven.   Income-driven repayment plans can be a great way to ease the burden of federal student loan payments. Keep reading to find out if an IDR is right for you.   Photo by Suzy Hazelwood

How does an income-driven repayment plan work?

An IDR plan allows you to pay a monthly loan payment based on the amount of discretionary income you have after you pay living expenses.   Each year, you’ll report any changes in your income or family situation, which means that your loan payments might be lowered if you have a child or lose your job. Conversely, if you get married, get a raise, and/or get a new job with a higher salary, your loan payments will be adjusted higher.   The point is that an IDR helps you repay your loans in a way that fits your financial situation.  

IDR plans are longer

Depending on the plan you choose, you’ll be on a 20-year or a 25-year payment plan. The extended life of the loan means lower payments for you. It does, however, also mean increased interest. But most people who select an IDR plan do so because paying more interest over a longer period is preferable to crushing loan payments that keep them from buying a house or that forces them to default on other payments.  

IDR loans are forgivable

Income-driven repayment plans are also forgivable loans. This means that any unpaid amount at the end of your loan period is forgiven by the federal government. Keep in mind that the amount being forgiven is deemed to be taxable income. You’ll want to plan for that when you get to the last year of your loan.   If you are starting loan repayments at age 22, you might think 25 years is an eternity. But paying off your loans at the age of 47 (or having the remaining amount forgiven) will go a long way to ensuring that you can save for retirement. And you’ll want to plan ahead so your own loans out of the way and you can better help your own kids pay for their college education.   Photo by Pixabay

Which income-driven repayment plan is best for you?

There are four different income-driven repayment plans. While they appear similar on the surface, you’ll want to research carefully to make sure you pick the right plan for your unique circumstances.   Here’s a quick overview of each plan along with benefits and information about who that plan is best for.  

1. REPAYE (Revised Pay As You Earn)

REPAYE is best for:
  • High wage earners or those who will have high wages in the future.
  • Single people (a spouse’s income will increase the amount of discretionary income you have for loan payments).
  • People who don’t have graduate school loans.

2. PAYE (Pay As You Earn)

PAYE is best for:
  • Low wage earner and/or married with two incomes.
  • People with grad school loans.

3. IBR (Income-Based Repayment)

IBR is best for:
  • Low wage earners.
  • Someone who doesn’t qualify for PAYE.

4. ICR (Income-Contingent Repayment) 

ICR is best for:   Photo by Ketut Subiyanto

What Are The Benefits Of Each Plan?

Each plan has specific benefits. Keep reading to find out more.  

1. Benefits of REPAYE

  • Does not require you to show financial hardship
  • Counts spouse’s income
  • Offers forgiveness after 20 years, but adds five years for graduate school loans
  • Provides generous subsidies on interest for first years of the loan (saving you money in the long-run)

2. Benefits of PAYE:

  • Considers partial financial hardship
  • Offers forgiveness after 20 years with no penalty for grad school
  • Limits amount of interest that can be capitalized, which keeps your costs lower

3. Benefits of IBR:

  • Payments never increase
  • Available to those who took out loans after 7/1/14
  • Opportunity to reconsolidate if income changes
  • Offers forgiveness after 20 years

4. Benefits of ICR:

  • Lower payments over extended loan life
  • Offers forgiveness after 20 years

How is income-driven repayment calculated?

Your IDR will be calculated based on your income. You’ll need to show tax returns from the previous year. You’ll find it easy to access your IRS documents directly through a secure link on the IDR application site.    If your gross adjusted income has changed since your last tax return, you can submit additional documentation such as pay stubs. In fact, you’ll need to update your income information every year for an IDR.   Once you’ve submitted evidence of your income, the federal government will determine what they consider your discretionary income by subtracting whatever the poverty level is for living expenses in your location.   Then they use a percentage of your discretionary income (between 10% and 20%, depending on the plan) to determine your loan payments, generally resulting in lower payments than you would have if you were not part of an IDR plan.  

1. REPAYE is calculated by:

  • Using 10% of your discretionary income spread out over 12 months

2. PAYE is calculated by:

  • Using 10% of your discretionary income spread out over 12 months

3. IBR is calculated by:

  • Using 15% of discretionary income spread out over 12 months
  • Using 10% of discretionary income spread out of 12 months for new borrowers

4. ICR is calculated by:

  • Using 20% of discretionary income spread out over 12 months
  • Setting a fixed amount for 12 years (if that is cheaper than 20% of discretionary income)

Is an income-driven repayment plan worth it?

IDR plans are the best way to repay your federal student loans if you have found yourself in a situation where you simply cannot manage high payments on a shorter loan life. Yes, it would be nice to be able to pay your loans off in 10 years, but for some people, that just isn’t realistic. IDRs can help you consolidate and reduce those monthly payments.   Of course, any time you are extending the life of the loan, you are increasing the amount of interest you’ll eventually pay. It simply costs more to have a 20-year loan than a 10-year loan. But remember that if you are on an IDR plan and your income goes up, you can increase your loan payments and so pay less interest over the long-term.   If you are working toward loan forgiveness, an IDR will decrease your payments dramatically. In some cases, you may be free of the loan after five years.    Photo by Vlada Karpovich

Will I qualify for an income-driven repayment plan?

You will probably qualify for an IDR if you have a low credit score and a low income. In other words, what generally keeps you from qualifying for most other loans is exactly what would qualify you for this one!   You do need to have attended and graduated from an eligible school.   If your income is high and your credit score is 600 or more, you may not qualify. However, you probably wouldn’t want to be on an IDR plan in those circumstances. You’d likely get a better deal by just consolidating your loans.  

Where do I send my application?

Once you fill out the IDR application, you’ll be assigned a loan servicer who can answer questions and help you decide exactly which plan is right for you.   If you think an IDR might be a good solution for you, follow these simple steps to get started:
  1. Gather all the information you’ll need. That includes your government-issued ID, your loan information, and your personal information, such as phone, email, and social security number. If you are married, you’ll need your spouse’s personal information as well.
  2. Go to the online IDR application at Federal Student Aid. (You can see what the form looks like here.)
  3. Create a free account.
  4. You can use the loan calculator to see what your loan payments would be under each plan.
  5. Fill out the form.
  6. Submit and wait to hear back from your loan servicer.