Income-driven repayment (IDR) plans for federal student loans provide borrowers with a personalized way to manage their debt.¹ Monthly repayments can be adjusted based on factors like income and family size, making student loans more accessible and affordable. Understanding IDR options is vital for borrowers seeking manageable student loans and a path toward financial stability.
How is income-based repayment calculated?
While your income is the primary factor in an IDR plan, other elements play a significant role in determining your monthly payment.² Income-based student loan repayment is calculated using a complex government formula that takes into account numerous factors, including:
- Income-driven plan selection
- Family size and location
- Tax filing status
- Federal loan debt
- Spouse’s income and debt (if applicable)
There’s a helpful tool if you’re wondering how income-based repayment is calculated. The exact calculation varies depending on the specific IDR plan you choose. Generally, your payment is set at a percentage of your discretionary income or the difference between your annual income and 150% of the poverty guideline for your family size and location.
Which income-driven repayment plan is best for you?
Most federal student loans are eligible for at least one IDR plan. Selecting the right IDR plan can significantly impact your financial future.³ Here are the four main options available from the U.S. Department of Education:
- Saving on a Valuable Education (SAVE): This is the newest federal government plan, offering the lowest monthly payments for most borrowers.
- Income-Based Repayment (IBR): The IBR plan caps payments at 10% or 15% of discretionary income, depending on when your loan started.
- Pay As You Earn (PAYE): PAYE limits payments to 10% of discretionary income but has stricter eligibility requirements.
- Income-Contingent Repayment (ICR): This is the only IDR option for Parent PLUS loan borrowers, with payments set at 20% of discretionary income. Parent PLUS loans are made directly to parent borrowers.
Each plan has unique features and eligibility criteria, so it’s essential to carefully evaluate your options before deciding. You can use this student aid loan simulator to see how your loan repayment would change under different repayment plans. This also will help you research which loan repayment plan is based solely on annual income. The simulator will ask for basic information about your income, family size, tax filing status, and state of residence and then present different scenarios for your review.
5 Disadvantages of income-based student loan repayment plans
While IDR plans offer many benefits, there are also potential drawbacks to consider.⁴ These include:
- Higher interest accumulation over time
- Possible tax liability related to student loan forgiveness
- Impact of spouse’s income on payment calculations
- Extended repayment periods
- Potential for negative amortization in which the loan balance grows over time
It’s crucial to weigh the pros and cons when considering an IDR plan.
How to apply for an income-based repayment plan
Applying for an IDR plan is a straightforward process:
Go to studentaid.gov
Visit the official federal student aid website to access the IDR application.
Complete the application
Fill out the required personal information, including family size, your most recent federal income tax return, and current income details.
Provide additional documentation, if necessary
If you don’t file taxes or your income has changed significantly, you may need to submit additional proof of income, such as recent pay stubs.
Work with an expert on next steps
Income-based repayment plans offer a valuable option for managing student loan debt. Ultimately, the best repayment strategy depends on your financial situation.⁵ Consider consulting with a financial advisor or student loan counselor to determine the most appropriate path based on your unique circumstances.
Read our comprehensive guide to learn more about how to get a student loan.