Income-driven repayment plans cap your monthly payments at a certain percentage of your discretionary income. Unlike standard plans, which break up the loan repayment over 120 months, income-based plans extend payments to 20 or even 25 years, reducing your monthly payment and freeing up money in your budget.
While these plans can be really helpful for some people, it’s important to understand all the pros and cons before you sign up.
4 Types of income-driven repayment plans
There are four separate income-driven repayment plans available to federal student loan borrowers:
- Revised Pay As You Earn (REPAYE)
Under a REPAYE plan, your payment is capped at 10% of your discretionary income. For undergraduate loans, your terms are extended for 20 years. If any of your loans were for graduate school, your repayment term stretches to 25 years. - Pay As You Earn (PAYE)
With PAYE plans, your payment is 10% of your income but never exceeds what your payment would be under a standard repayment plan. Your repayment term is 20 years. - Income-Based Repayment (IBR)
If you’re a borrower after July 1, 2014, your payment is capped at 10% of your income, and you will make payments for 20 years. If you borrowed before that date, your term will be 25 years. - Income-Contingent Repayment (ICR)
On an ICR plan, you pay the lesser of either 20% of your discretionary income or what you would pay with a fixed plan over twelve years. If you qualify for the 20% option, you can make payments for up to 25 years.
Under all four plans, any remaining loan balance is forgiven if your federal student loans aren’t fully repaid at the end of the repayment period. For any income-driven repayment plan, periods of economic hardship deferment, periods of repayment under certain other repayment plans, and periods when your required payment is zero will count toward your total repayment period.
Whether you will have a balance left to be forgiven at the end of your repayment period depends on a number of factors, such as how quickly your income rises and how large your income is relative to your debt. Because of these factors, you may fully repay your loan before the end of your repayment period. Your loan servicer will track your qualifying monthly payments and years of repayment and will notify you when you are getting close to the point when you would qualify for forgiveness of any remaining loan balance.
If you’re making payments under an income-driven repayment plan and also working toward loan forgiveness under the Public Service Loan Forgiveness (PSLF) Program, you may qualify for forgiveness of any remaining loan balance after you’ve made 10 years of qualifying payments, instead of 20 or 25 years. Qualifying payments for the PSLF Program include payments made under any of the income-driven repayment plans.
There is also a fixed plan that is pretty much higher for you to pay but works for you in the long run, its called the standard repayment plan.
Standard repayment is the most popular repayment plan for federal student and parent loans, in part because it is the default option for borrowers who have not chosen another repayment plan.
Standard repayment is a level payment plan, with up to 120 fixed monthly payments during a repayment term of up to 10 years.
There is a $50 minimum monthly payment for Direct Subsidized and Unsubsidized Loans, PLUS Loans, and Direct Consolidation Loans and a $40 minimum monthly payment for Perkins Loans. Some borrowers with an outstanding Perkins Loan made before October 1, 1992 may have a $30 minimum payment. The final payment may be less than the minimum monthly payment. Borrowers with lower loan balances of just a few thousand dollars may take less than 10 years to repay their loans under standard repayment because of the minimum monthly payment.
Borrowers save money by paying less interest over a standard repayment term because standard repayment offers the shortest repayment term.
Will I always pay the same amount each month under an income-driven repayment plan?
No. Under all of the income-driven repayment plans, your required monthly payment amount may increase or decrease if your income or family size changes from year to year. Each year you must “re-certify” your income and family size. This means that you must provide your loan servicer with updated income and family size information so that your servicer can recalculate your payment. You must do this even if there has been no change in your income or family size.
Your loan servicer will send you a reminder notice when it’s time for you to re certify. To re certify, you must submit another income-driven repayment plan application. On the application, you’ll be asked to select the reason you’re submitting the application. Respond that you are submitting documentation of your income for the annual re-certification of your payment amount.
Although you’re required to re certify your income and family size only once each year, if your income or family size changes significantly before your annual certification date (for example, due to loss of employment), we will submit updated information and ask your servicer to recalculate your payment amount at any time. To do this, submit a new application for an income-driven repayment plan. This actually means that your financial circumstances changed during the 12 month period which means,we will submit documentation early so Servicer can recalculate your payment immediately to keep you on the lowest payment option available.