Income Driven Repayment Plan: Is It a Good Idea?

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If you’re facing a mountain of federal student loan debt and are ready to get on a repayment plan, there are plenty of options available. And specific plans are available for those who want to pay based on income, which can be a game-changer if you’re earning low wages. But first it’s important to understand if income-driven repayment (IDR) might be a good idea for repaying your student loans.

What is income-driven repayment?

Income-driven repayment is a federal government payment plan option for people with student loan debt. The monthly payment is determined by your income and family size. Those with lower incomes and larger families will end up paying less per month than those with a higher income or smaller family to support.

What types of IDR plans are available?

There are four income-driven repayment plans to choose from. Your payments will be limited to 10% to 20% of your discretionary income, depending on which plan you choose. Your discretionary income is what you have leftover after paying necessities like taxes, transportation, and food.

With IDR plans, your loan balance, if any, will be forgiven after 20 or 25 years, depending on the plan. The four types of IDR plans and the amount you’ll need to pay are:

• Income-based repayment: 15% of discretionary income
• Income-contingent repayment: The lesser of 20% of discretionary income or fixed amounts based on a 12-year loan term
• Pay as you earn: 10% of discretionary income
• Revised pay as you earn (REPAYE): 10% of discretionary income

When is income-driven repayment a good idea?

Income-driven repayment tends to be a good idea when:

• You’re struggling to meet minimum payments for your loans
• You want to avoid late fees or missed payments that could hurt your credit score
• You are considered low income
• Your occupation will qualify for Public Service Loan Forgiveness (PSLF)
• You’re unemployed

But do keep in mind that IDR plans do have some downsides, including:

• Consideration of your and your spouse’s income. If you file joint taxes with your spouse, both incomes will be considered when calculating your payment amount. That means you could end up with a higher monthly payment even though you are considered low income.
• Greater interest is paid over the life of the loan. Because the loan terms extend to 20 or 25 years of repayment, you could wind up paying more in interest over time than if you stick to the initial 10-year loan term.
• Your forgiven balance is taxed. If you don’t qualify for PSLF and haven’t repaid the loan balance during the repayment term, whatever loan amount you have forgiven after 20 or 25 years will be included as income and taxed at your regular rate.

How to choose an IDR plan

The best plan to apply for likely will be the one you qualify for with the smallest monthly payment. After discussing options with your lender, it’s a good idea to:

1. Calculate your loan payoff date: Before you apply for IDR, consult a debt payoff calculator to get an estimate of how long it will take to pay off your loans without the assistance of an income-driven repayment plan. If the payment and loan term seems reasonable, it may be wise to forego IDR altogether.

2. Apply for income-driven repayment: You’ll need to submit an application for IDR to be approved in the government program. Applications are available online or by requesting a paper form from your loan provider.

3. Get recertified for IDR each year: If approved, you’ll need to recertify your status in an IDR plan each year by verifying your income via tax returns and family size. Any changes—like an increase in income—mean your payment may increase as well. Failure to recertify means you’ll need to return to your regular payment until you re-apply for the program.

Income-driven repayment plans may be an excellent option for those struggling to meet minimum payments because of low income. And IDR is an excellent option for those with an occupation that qualifies for PSLF. But be sure to talk with your lender to determine the option that will save you the most money to make sure IDR is a good idea for your unique financial situation.