After payments were paused for over 3 years, borrowers resumed repaying federal student loans in October 2023. If you’re looking for a way to lower your payments, even if you pay more over the long term, an income-driven repayment (IDR) plan might be an option. These plans require you to report your income and family size and recertify—another word for updating that info—every year, which might change the amount you’re paying, depending on the year. But what exactly are IDR plans?
What is an income-driven repayment plan?
IDR plans are federal student loan repayment plans that factor in your income to determine your monthly repayment amount, with lower amounts generally for people earning less and higher amounts generally for people earning more.
But there are some nuances. The exact amount you pay each month is a percentage of your discretionary income, aka your household income minus a percentage above the Federal Poverty Guidelines for your family size and state. If your income is low enough relative to your family size, your monthly payment could be $0.
IDR plans are different from traditional repayment plans, such as the Standard Repayment Plan—the plan your loan servicer will automatically enroll you in if you don’t pick a plan. Monthly payments tend to be higher on the Standard Repayment Plan than on IDR plans because the former payments are calculated based on your loan balance and interest rate, not your income and family size. But higher monthly payments generally mean you pay more toward your balance and can pay off the loan more quickly. When you pay off your loan more quickly, interest has less time to add up. So you’re likely to pay less in interest overall on a Standard Repayment Plan because your repayment period would probably be shorter than with an IDR plan.
IDR plans apply only to federal student loans, not private student loans. And you can only pay off loans that aren’t in default through an IDR plan. If you have federal student loans in default, learn how to get out with the Department of Education’s Fresh Start program. Once you’re out of default, you can apply for an IDR plan.
Types of income-driven repayment plans
There are 4 types of IDR plans: SAVE, PAYE, IBR, and ICR. Each has slight differences, which could include calculating monthly payments based on different definitions of discretionary income and different percentages of discretionary income, different lengths of time to hit forgiveness, and different loans that are eligible.
SAVE (formerly REPAYE or Revised Pay As You Earn): Saving on a Valuable Education plan
If you were previously on the REPAYE plan, you were automatically switched over to the SAVE plan. If not, you’d have to enroll in it.
Percentage you pay: Under this plan, your discretionary income is considered the difference between your adjusted gross income (AGI) and 225% of the US Department of Health and Human Services (HHS) Poverty Guidelines.
Until July 2024, borrowers’ payments are 10% of their discretionary income. When the SAVE plan is in full effect in July 2024, borrowers with undergraduate loans will see their payments halved, to 5% of their income above 225% of the poverty line. Those with only graduate loans will continue monthly payments of 10% of their discretionary income.
It’s more complicated for those with both undergrad and graduate loans. They’ll pay a weighted average between 5% and 10% of their discretionary income, with the original principal balances of their loans factored in.
When the remainder of your loan is eliminated: Borrowers whose original principal balances were $12,000 or less will have the balance eliminated after 10 years in repayment. It’ll take everyone else with undergraduate loans 20 years. Graduate loans take 25 years. And any loan elimination could have tax implications.
Eligible loans:
- Direct Subsidized and Unsubsidized loans
- Direct Parent Loans for Undergraduate Students (PLUS loans) for graduate or professional students
- Direct Consolidation Loans that didn’t repay PLUS loans made to parents
- Subsidized and Unsubsidized Federal Stafford loans if consolidated
- Federal Family Education (FFEL) PLUS loans for graduate or professional students if consolidated
- FFEL Consolidation Loans if consolidated
- Federal Perkins Loans if consolidated
More must-knows: Monthly payment dollar amounts aren’t capped. Translation: Your monthly cost could be higher on SAVE than on the 10-year Standard Repayment Plan. But the Department of Education estimates 1 million out of more than 40 million federal student loan borrowers qualifies for $0-per-month payments on the SAVE plan. And remember: Your payment amount might change from year to year, you might be paying for 15 years longer—and therefore owing more interest—than with a standard repayment plan, and you could owe taxes if your loan balance is eliminated. If you don’t recertify by the deadline, you’ll be moved to a different plan where your income isn’t factored into the payment amount and would probably be higher as a result.
PAYE: Pay As You Earn Repayment Plan
Percentage you pay: Under this plan, discretionary income is the difference between your AGI and 150% of the HHS Poverty Guidelines for your family size and state. Your monthly repayment amount is capped at 10% of discretionary income.
When the remainder of your loan is eliminated: After 20 years of payments
Eligible loans:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans for graduate or professional students
- Direct Consolidation Loans that didn’t repay PLUS Loans made to parents
- Subsidized and Unsubsidized Federal Stafford Loans (from the FFEL program) if consolidated
- FFEL Consolidation Loans that didn’t repay PLUS Loans made to parents if consolidated
- Federal Perkins Loans
More must-knows:
Your income must be low enough that your payments would be lower than if you were on the Standard 10-year Repayment Plan. And again, you likely will pay for 10 more years and pay more interest. Plus, you could owe taxes if your loan balance is eliminated. If you fail to recertify, you would remain on this plan, but your monthly payment amount would default to what it would be on the 10-year Standard Repayment Plan.
Plus, you’re only eligible if you satisfy both of the following requirements:
- You can’t have had an unpaid balance on a Direct Loan or Federal Family Education loan when you received one of those types of loans on or after October 1, 2007. (Consolidating these loans doesn’t count.)
- You must have received a disbursement of a Direct Subsidized or Unsubsidized Loan or a Direct Plus Loan for students on or after October 1, 2011, or a Direct Consolidation Loan based on an application received on or after that same date.
IBR: Income-Based Repayment Plan
Percentage you pay: As with PAYE, discretionary income is the difference between your AGI and 150% of the HHS Poverty Guidelines for your family size and state. Monthly payments are 15% of your discretionary income if you began borrowing through this plan before July 1, 2014. Newer borrowers’ payments are generally 10% of your discretionary income.
When the remainder of your loan is eliminated: 25 years, if you began borrowing through this plan before July 1, 2014. It’s 20 years for more recent borrowers
Eligible loans:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans for graduate or professional students
- Direct Consolidation Loans that didn’t repay PLUS Loans made to parents
- Subsidized and Unsubsidized Federal Stafford Loans (from the FFEL program)
- FFEL PLUS Loans made to graduate or professional students
- FFEL Consolidation Loans that didn’t repay PLUS Loans made to parents
- Federal Perkins Loans if consolidated
More must-knows: Also like PAYE, your monthly payment must be lower than what you’d pay on the 10-year Standard Repayment Plan, unless you fail to recertify—then you’d pay exactly what you’d pay if you were on a 10-year Standard Repayment Plan. Beware of the same drawbacks as other IDR plans: longer repayment terms, varying payment amounts, more interest owed, and possible taxes owed if your loan balance is eliminated.
ICR: Income-Contingent Repayment Plan
Percentage you pay: Discretionary income in this case is the difference between your annual income and 100% of the HHS Poverty Guidelines for your family size and location. Monthly payments are the lesser of 20% of your discretionary income or what you might have paid on a standard repayment plan with a fixed monthly payment over 12 years, adjusted based on your income.
When your loan balance is eliminated: 25 years
Eligible loans:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans for graduate or professional students
- Direct PLUS Loans made to parents if consolidated
- Direct Consolidation Loans that did and didn’t repay PLUS Loans made to parents
- Subsidized and unsubsidized Federal Stafford loans from the FFEL program if consolidated
- FFEL PLUS loans made to graduate or professional students if consolidated
- FFEL PLUS loans made to parents if consolidated
- FFEL consolidation loans that did and did not repay PLUS loans to parents if consolidated
- Federal Perkins Loans if consolidated
More must-knows: It’s possible for your monthly payments to be higher on the ICR plan than if you were on the 10-year Standard Repayment Plan. It bears repeating: Nearly all IDR plans have longer repayment periods and charge more overall interest. And your monthly payment could change each time you recertify. If you don’t recertify, interest you haven’t paid would be added to your loan balance—which would cause your monthly payment to be higher because interest would be calculated based on this higher balance. Your new payment amount would be what you’d pay on a 10-year Standard Repayment Plan, but you’d remain on an ICR plan. Lastly, a loan balance elimination could be taxed.
How to pick a loan repayment plan and apply
You could use the Department of Education’s loan simulator to help choose a federal student loan repayment plan, which could be one of the 4 IDR plans. Once you’ve found the plan that makes the most sense for your situation, you may apply to enroll in that plan.
Taxes on loan balance elimination under income-driven repayment plans
If your federal student loans are eliminated on or before December 31, 2025, you will not owe federal income tax because of the American Rescue Plan Act of 2021. However, even before then, you might have to pay state income tax depending on where you live, including in Indiana, Mississippi, North Carolina, and Wisconsin. Other states are still deciding. If you’re subject to state taxable income, you will likely receive a 1099-C form. If $600 or less of your loans were canceled, you might not receive this form. Anyone whose loan balance is eliminated in 2026 or later could owe federal taxes.
Pros of income-driven repayment plans
There are some benefits to paying off your student loans through an IDR plan. They include the following:
- They generally offer lower monthly payment amounts than the Standard Repayment Plan, which could keep you from defaulting and wrecking your credit.
- Your monthly payment could be $0 if your income is low for your family size and location.
- You could score loan balance elimination after consistent payments over the repayment term.
- Participation doesn’t affect your credit score, unless you default.
Cons of income-driven repayment plans
While IDR plans can offer lower monthly payments and forgiveness, there are a few potential cons to consider, including:
- There could be a longer repayment duration—10 to 15 years, to be exact—compared to the 10-year Standard Repayment Plan.
- You likely will end up paying more in interest over the life of the repayment period because IDR plans tend to have longer repayment periods than a 10-year Standard Repayment Plan, and that could give interest more time to add up.
- Your credit isn’t negatively impacted by signing up for an IDR plan. However, because you’re repaying 10 or 15 years longer than under the standard plan, your ability to tap new lines of credit might be affected.
- Unless you consent to having your tax records used to automatically recertify your income and family size, you will have to manually recertify your income and family size every year. (But if either your income or family size changes before your recertification date, you can update your info and even switch IDR plans, say, if your current one is no longer the best one for your situation.) If you don’t recertify by the yearly deadline, your family size will default to 1, which could increase your monthly payment if you actually have a larger family. There are more consequences depending on which IDR plan you’re on.
- You could get a tax bill for forgiven loans in certain states and perhaps even for federal taxes starting in 2025.
- Your particular loans might not be eligible for an IDR plan.
- If you are already on a repayment plan, switching to an IDR plan would reset the clock, generally extending your payments for 20 to 25 years.