Can Income-Driven Repayment Lower My Student Loan Payments?

young woman holding phone while making student loan payment

If you're shouldering substantial student debt, you're not alone. Student loan debt hit a record high in 2020: Total balances reached $1.57 trillion, while the average student loan balance was $38,792, according to Experian data.

Student loan borrowers have had a break from federal loan payments since March 2020 as a result of pandemic relief measures, but payments are scheduled to resume in May 2022. If you can't afford your student loan payments, income-driven repayment (IDR) may be an option. Depending on your income and family size, you may be able to lower your monthly payments substantially using an IDR plan. Here's what you need to know.

What Is an Income-Driven Repayment Plan?

Income-driven repayment plans are designed to lower payments on federal student loans by basing your payment amounts on your income and family size. Reducing your payments can help you avoid paying late or defaulting on your loans. For borrowers with low or no income, income-driven repayment may lower your monthly payments down to $0. IDRs do not apply to private student loans.

There are four types of income-driven repayment plans:

  • Revised Pay As You Earn Repayment (REPAYE): Under the REPAYE plan, your payments are typically 10% of your discretionary income. Your balance is eligible for forgiveness after 20 years if you have only undergraduate debt, or 25 years if part of the debt paid for graduate school.
  • Pay As You Earn Repayment (PAYE): With this plan, your payments are typically 10% of your discretionary income and are always less than what you'd pay under the 10-year Standard Repayment Plan. You may qualify for forgiveness in 20 years.
  • Income-based repayment (IBR): Your payments under the IBR Plan are capped at 10% of your discretionary income if you became a new borrower on or after July 1, 2014, and your repayment term is 20 years. If your first federal student loan predates that, you'll pay 15% of your income for a maximum of 25 years. Loans in either case are eligible for forgiveness at the end of the repayment term.
  • Income-contingent repayment (ICR): Under the ICR Plan, your payments will be equal to 20% of your discretionary income or what you would be required to pay on a fixed repayment plan with a 12-year term—whichever is lower. You're eligible for balance forgiveness in 25 years.

If you qualify for $0/month payments through IDR, your payments still count toward balance forgiveness. Periods of deferment due to economic hardship, as well as periods of loan forbearance like the COVID-19 student loan payment pause, also count toward forgiveness.

How to Use Income-Driven Repayment to Reduce Your Student Loan Payments

1. Estimate Your Payments

The Federal Student Aid Loan Simulator can help you estimate your payments and compare what you'd pay across plans. Calculating your payments can help you find the best payment plan for you, and it can also help you understand how your payments will affect your balance over time.

If you're a low-income or unemployed student loan borrower, you may qualify for an income-driven repayment with monthly payments as low as $0. For IBR, PAYE and REPAYE plans, your monthly payment is reduced to $0 if you earn less than 150% of the poverty line, based on your state and family size. For the ICR repayment plan, your monthly payment will be reduced to $0 if your income is less than 100% of the poverty line.

You'll have to recertify your income and family size each year to remain eligible for income-driven repayment. If your income and family size change, your payments can also change.

2. Consider Balance Forgiveness Taxation

Each income-driven repayment plan is compatible with Public Service Loan Forgiveness (PSLF). If you qualify for PSLF, you'll only need to make payments for 10 years to be eligible for forgiveness. In contrast, you'll need to make 20 or 25 years' worth of payments to qualify for forgiveness through income-driven repayment without PSLF.

Student loan balance forgiveness can be taxed and result in a sudden, potentially unaffordable tax bill. PSLF, on the other hand, is tax-free, making income-driven repayment a good option for those who qualify for PSLF.

3. Factor In Interest

Income-driven repayment plans can put you at risk of negative amortization, which is when your balance grows, rather than shrinks, over time. Negative amortization happens when your monthly payments don't cover what your loan is accruing in interest.

While watching your balance grow can be anxiety-inducing, if you're working toward public service loan forgiveness, negative amortization may not harm you because you won't be taxed on your forgiven balance. But if you fail to recertify or no longer qualify for your IDR plan, you could be hit with larger standard payments as a result of your larger balance.

4. Work With Your Servicer

One easy way to determine which plans you're eligible for is to ask your loan servicer. You can fill out an application requesting your servicer to put you on whichever of the income-driven repayment plans you qualify for that will set your payments as low as possible.

Additional Ways to Lower Your Student Loan Payments

If you're not sure that income-driven repayment is the right option for you, but you need to lower your payments, consider these other options.

Consider an Extended Repayment Plan

An extended repayment plan can help you lower your monthly payments by extending your loan term to 25 years. If you don't qualify for income-based repayment, an extended repayment plan may still be able to help you lower your monthly payments.

Keep in mind that the extended plan won't always provide you with the lowest payment amount, depending on your income. You'll also pay more in interest over time by extending your payments.

Consolidate Your Loans

If you have multiple federal student loans with various interest rates, consolidating your loans through the federal government can streamline your repayment. You may also be able to extend your term up to 30 years, which can help lower your monthly payments. Remember that you'll pay more in interest over time if you extend your term.

Refinance Your Loans

Refinancing student loans through a private lender may be an option for those with good credit and a stable income. Doing so may help you qualify for a lower interest rate, depending on your credit score. You can check your score for free through Experian.

But you'll also forfeit many of the protections federal student loans offer when you refinance with a private lender, so it isn't a decision to take lightly. You'll lose access to federal student loan programs like loan forgiveness and income-driven repayment plans, for example.

If you're confident losing these safeguards won't put you in a bind, refinancing your student loans into a private loan with a longer term can help you reduce your payments.

Make a Plan to Pay Back Student Debt

While a calculator can help you figure out your payments, only you can do the math to determine if a lower payment now will benefit you in the future. Lowering your payments with an income-driven repayment plan may free up cash now, but make sure you understand how what you pay now will impact the cost of your loan long term.

If you need help understanding your options, contact your student loan servicer or a financial advisor who can lay out the financial implications of loan payment plans. A reputable credit counselor may also be able to help you develop a plan for paying off your student loans. If money's really tight, consider working with a nonprofit that offers no-cost financial assistance.

The purpose of this question submission tool is to provide general education on credit reporting. The Ask Experian team cannot respond to each question individually. However, if your question is of interest to a wide audience of consumers, the Experian team may include it in a future post and may also share responses in its social media outreach. If you have a question, others likely have the same question, too. By sharing your questions and our answers, we can help others as well.

Personal credit report disputes cannot be submitted through Ask Experian. To dispute information in your personal credit report, simply follow the instructions provided with it. Your personal credit report includes appropriate contact information including a website address, toll-free telephone number and mailing address.

To submit a dispute online visit Experian's Dispute Center. If you have a current copy of your personal credit report, simply enter the report number where indicated, and follow the instructions provided. If you do not have a current personal report, Experian will provide a free copy when you submit the information requested. Additionally, you may obtain a free copy of your report once a week through December 31, 2022 at AnnualCreditReport.