Income-Driven Repayment Plans
Income-driven repayment plans help by lowering monthly payment amounts. These programs also provide forgiveness for borrowers still repaying their loans after 20 or 25 years (depending on the plan) regardless of their chosen profession. They are the preferred repayment plans for most borrowers working towards Public Service Loan Forgiveness, because they help ensure their monthly payments are affordable and that they receive the full forgiveness they have earned in return for their public service.
Income-Based Repayment (IBR) can significantly reduce the monthly payments of high debt/low income borrowers who have a "partial financial hardship." Borrowers have a partial financial hardship if their annual educational debt payments exceed 15 percent of their discretionary income (defined as adjusted gross income minus 150 percent of the federal poverty level for a family the borrower's size).
Annual student debt payments under IBR are capped at 15 percent of a borrower's discretionary income and, if a borrower is still repaying after 25 years, the government will forgive the amount left on these loans. This forgiveness is currently taxable.
IBR is available for FFEL and Federal Direct Loans.
Pay As You Earn
In 2011, President Obama proposed an initiative known as “Pay As You Earn” to establish a 10 percent payment cap and 20-year taxable forgiveness for new borrowers beginning in 2012. The plan became available on December 21, 2012.
There are two requirements that borrowers must meet to be eligible for these enhanced provisions: 1) Borrowers must have taken out loans after a certain date; and 2) Borrowers must demonstrate a “partial financial hardship.”
Only borrowers who take out loans after a certain date – so called “new borrowers” – are eligible for the plan. This requirement has two prongs:
- First, you must borrow your first federal loan on or after Oct. 1, 2007. If you had federal loans from before Oct. 1, 2007, you can still meet this test if you completely repaid those loans before taking out another loan on or after Oct. 1, 2007.
- Second, you must receive a new loan, receive a disbursement on an existing loan, or consolidate your loans on or after Oct. 1, 2011.
As a result, many borrowers with loans from 2007 and earlier, many students who graduated in 2011 or earlier and many borrowers already in repayment will not be able to benefit from these changes. However, if you do not meet both these requirements, you still may be eligible for IBR or ICR.
The second requirement is that eligible borrowers must have a partial financial hardship (similar to IBR) to be able to enroll in Pay As You Earn. If the annual amount due on your outstanding Federal Direct and FFEL Loans under a standard 10-year repayment plan would exceed 10 percent of your “discretionary income,” you meet this threshold.
Only Federal Direct Loans are eligible for Pay as You Earn, so you will need to consolidate any FFEL Loans into Federal Direct if you wish to take advantage of this plan.
Income-Contingent Repayment (ICR) calculates your monthly payments on the basis of your adjusted gross income (plus your spouse’s income if you’re married and file your taxes jointly), family size, and the total amount of your Direct Loans. You may pay up to 20 percent of your income in ICR and it provides for taxable forgiveness after 25 years.
There is no partial financial hardship threshold you must meet before enrolling in ICR. For this reason, even if you don’t qualify for IBR or PAYE, you still may benefit from ICR.
The REPAYE plan limits monthly payments to 10 percent of your discretionary income. Discretionary income is the difference between your income (as determined by your most recent tax return) and 150 percent of the poverty guideline as determined by your family size and state of residence. Under the REPAYE plan, any unpaid balance is forgiven after payments have been made for 25 years (if loans under the plan were used for graduate school) or 20 years (if loans under the plan were used solely for undergraduate study).
Under the REPAYE plan, if married, your spouse's income is used to determine the eligible amount of discretionary income from which your payment amounts are calculated. Additionally, there is no cap on the amount of your payments. As such, borrowers with high single or joint incomes may find themselves making payments higher than they would otherwise make under the 10-year standard repayment plan.
Unlike the Pay-As-You-Earn, the REPAYE plan does not require the borrower to document a financial hardship in order to participate in the plan.
In order to remain in the REPAYE plan, the borrower must submit an annual certification form which documents any changes in the borrower's discretionary income from the previous year and recalculates the monthly payment amount accordingly.
Enrolling in an Income-Driven Repayment Plan
If you are entering repayment, select the repayment plan you prefer on the Department of Education's IBR/Pay As You Earn/ICR Request form. If you are unsure of your eligibility for – or if you simply want to enroll in the income-driven plan (for which you are eligible) that will provide you with the lowest monthly payment – you can check the box in Section 2 of the form requesting to be placed in the plan with the lowest monthly payment amount.
If you already are in repayment, contact your servicer and request to switch into the plan.
Federal Direct Loan borrowers, and some FFEL borrowers, may apply in one step at studentloans.gov either when entering repayment or switching plans.
There's much more to know about income-driven repayment plans and how they work, including what to do if you're married and important financial considerations like interest accumulation and capitalization. Be sure to sign up for a free informational webinar or get a copy of our ebook, Take Control of Your Future, to get the details!