Income-Driven Repayment Plans for Federal Student Loans

Written by: Reyna Gobel
Updated: 3/31/21

5 Things You Should Know About Income-Driven Repayment Plans for Federal Student Loans

  • Income-driven repayment plans help borrowers afford their payments when the standard payment is too high compared to their income.
  • While there is a formula for calculating income-driven repayments, the Repayment Estimator calculator will calculate it for you.
  • There may seem like there are a million types of income-driven repayment. But there are actually three most people use: Pay as You Earn, RePayE, and income-contingent repayment.
  • Borrowers with older loans can switch to RePayE to potentially lower payments and pay off loans faster.
  • Income-contingent repayment is an alternative for Parent PLUS Loan borrowers and borrowers with higher incomes that qualify for Public Service Loan Forgiveness.

When you can’t afford your federal student loan payments, it’s not uncommon to pretend they aren’t there. Luckily the federal government has a repayment options for borrowers to pay as little $0 monthly based on income. It’s called income-driven repayment. Learning about it can save your credit.

Here’s what you need to know to get a payment you can afford:

Who was the program designed for

The program was designed for borrowers whose student loan debt is considered too high compared to their income.

How you qualify

You’ll need to apply for income-driven repayment online. And it’s getting easier. Your income can be verified electronically with last year’s tax return. This is especially helpful for recent grads whose income was likely lower last year than it may be in future years. If your income has dropped since your last tax return, there are alternate ways to verify income such as submitting recent paystubs. You’ll want to contact your servicer to verify the best way to prove your income.

Note: It’s a good reminder to fill out tax returns if you haven’t. Even if you weren’t working or didn’t make enough to pay taxes, you could still potentially get a partial refund from the American Opportunity Credit if you paid college tuition last year.

Types of income-driven repayment plans

Often, you’ll hear about there being a million types of income-driven repayment plans for federal student loans. With good reason, this may seem overwhelming. However, there are three main ones you need to know about: Pay as You Earn, RePayE, and income-contingent plans.

Pay as You Earn and RePayE

Pay as You Earn is the most common type of repayment plan available. Payments may be as low as $0 and are based on a formula that payments should be about 10 percent of discretionary income. Discretionary income is considered what is left over after deducting 150 percent of the income that is concerned poverty level for your state. Luckily no one has to actually do the calculation. The federal government has a Repayment Estimator calculator on their website. The maximum repayment term is twenty years. The maximum the payment can ever increase to is the payment required for the 10-year standard repayment plan.

RePayE is essentially the same thing and has the same rules and payments as Pay as You Earn. The difference is it’s for older loans where the plan didn’t exist when they borrowed the loans. It expanded so these borrowers can switch to this newer plan.

Income-Contingent Repayment

I used to think income-contingent repayment was just something for Parent PLUS Loan borrowers who couldn’t qualify for Pay as You Earn or RePayE. The maximum repayment term is 25 years and the payment can be as high as 20 percent of discretionary income.

The reason for using income-contingent payments is if your income is too high to qualify for Pay as You Earn or RePayE, but it isn’t too high for the income-contingent plan. Income-contingent has a maximum payment equivalent to the 12-year standard repayment plan. Those seeking Public Service Loan Forgiveness that offers forgiveness after 10 years on-time payment while working for a public service would still have some forgiveness for what the extra two years would equal.

Public Service Loan Forgiveness really only works if you are on an income-driven repayment plan.

Note: If you already defaulted on your student loan, you can qualify for an alternate form on income-driven repayment plan called default rehabilitation. Default rehabilitation is a short-term program that helps you get your loans back in good standing in under a year with payments that are a bit higher but still income-based. Once complete, you can select any repayment plan you’d like.