What Is Income-Driven Repayment?

Quick Answer

Income-driven repayment plans allow federal student loan borrowers to reduce their monthly payment based on their income and other factors, and also extend their repayment term. Once the term is up, any remaining balance is automatically forgiven.

young couple sitting on the floor going over finances

Income-driven repayment plans are available to federal student loan borrowers who are struggling to afford the standard repayment plan. These plans use your income, family size and state of residence to determine what your monthly payment should be.

Depending on your situation, you may be able to choose from up to four different income-driven repayment plans, each with its own monthly payment calculation and repayment period. Here's what you should know about how these plans work, their benefits and drawbacks and how to apply.

How Income-Driven Repayment Plans Work

An income-driven repayment plan allows you to set your monthly student loan payment to an amount that you can afford based on how much you earn. Depending on which plan you choose, your monthly payment will be 10%, 15% or 20% of your discretionary income, which is calculated based on your household income, family size and state of residence.

These plans also extend your repayment term from 10 years with the standard repayment plan to 20 or 25 years. If you still have a balance at the end of your repayment period, the remainder will be forgiven.

How to Qualify for an Income-Driven Repayment Plan

Eligibility for income-driven repayment plans can vary depending on the plan and the types of loans you have. For starters, these plans are only available to borrowers with federal student loans―private lenders generally don't offer them.

That said, not all federal student loans immediately qualify. With some federal loan programs, you may need to consolidate your loans to make them eligible.

Additionally, two of the plans have an income requirement. For example, if your monthly payment on the Pay As You Earn (PAYE) or income-based repayment plan is lower than what it would be on the standard repayment plan, you may be eligible. You may also qualify for these plans if your student loan balance exceeds your annual income or represents a significant portion of your income.

If you're unsure whether you qualify for income-driven repayment, review the Federal Student Aid website or contact your loan servicer.

Types of Income-Driven Repayment Plans

There are currently four income-driven repayment plans available for eligible federal loan borrowers. Here's how each one works:

  • Income-based repayment (IBR): This plan caps payments at 10% of your discretionary income if you received your loan before July 1, 2014, with forgiveness after 20 years. For those who receive their loan on or after that date, the payment is 15% of your discretionary income with forgiveness after 25 years.
  • Pay As You Earn (PAYE): This plan cuts your monthly payments to 10% of your discretionary income and offers forgiveness after 20 years of repayment. Even if your income grows, your payment will never exceed the 10-year standard repayment plan amount. To qualify, you must have received your loan on or after October 1, 2007. You must also have taken out a direct loan or a direct consolidation loan after October 1, 2011.
  • Revised Pay As You Earn (REPAYE): This plan sets your monthly payments at 10% of your discretionary income. Your repayment term will be 20 years if all of your loans are undergraduate loans, but if any of your loans were for graduate study, the term will be 25 years.
  • Income-contingent repayment (ICR): Your monthly payment on this plan will be the lesser of 20% of your discretionary income or the amount you'd pay on a fixed 12-year repayment plan, adjusted according to your income. Your repayment plan will be extended to 25 years. Note that this is the only income-driven repayment plan available to parents who took out parent PLUS loans.

As you try to determine which plan to choose, it's important to note how discretionary income is calculated. For the IBR, PAYE and REPAYE plans, it's the difference between your annual income and 150% of the poverty guideline for your family size and state of residence.

For the ICR plan, your discretionary income is the difference between your annual income and 100% of the poverty guideline figure.

Pros and Cons of Income-Driven Repayment Plans

Getting on an income-driven repayment plan can provide relief for struggling federal student loan borrowers, but it's not always the best option in the long run. Here are some advantages and disadvantages to consider before you apply.

Pros

  • It provides immediate relief. If you're experiencing financial hardship now, an income-driven repayment plan can provide an immediate reduction of your monthly payment and relieve some of the pressure on your budget.
  • It can help you avoid default. Student loan default can have a significant negative impact on your credit history and financial wellness. By decreasing your monthly payments, you can avoid missed payments and default.
  • It can eventually result in forgiveness. Depending on your future income, you may be able to keep a low payment and get forgiveness once you've reached the end of your repayment term.

Cons

  • You need to recertify every year. Each year, you're required to recertify your income and family size. If your income grows or you forget to recertify, your monthly payment may increase, depending on which plan you're on.
  • You'll pay more interest. With lower monthly payments, less of what you pay goes toward paying down the principal balance of your loans, which means more interest over time. In some cases, an income-driven payment plan may not even be enough to cover the accrued interest, which can cause your student loan balance to grow over time instead of shrink.
  • You may not qualify for the plan you want. Depending on which type of loans you have and your financial situation, you may not be able to get on the income-driven plan you want.

How to Apply for Income-Driven Repayment

Whether you're planning to apply for an income-driven repayment plan or you're just thinking about it, here's how to go through the process:

  1. Before you apply, the Department of Education recommends that you contact your loan servicer and explain your situation to get some advice on whether income-driven repayment is right for you and which plan to choose.
  2. Visit the Federal Student Aid website to apply online or download the paper application form.
  3. Provide your name, Social Security number, address and contact information.
  4. Choose a plan or request that your loan servicer put you on the plan that gives you the lowest monthly payment.
  5. Share information about your family size, marital status and, if applicable, information about your spouse.
  6. Provide income information and include documentation, which may include a pay stub, a tax return or a tax transcript.
  7. Finish answering the remaining questions and sign the application, then submit it directly to your loan servicer.

Note that if you have multiple federal loan servicers, you'll need to submit a separate application to each one. And remember, you'll need to resubmit this application every year—your loan servicer will send you a reminder when it's time—to avoid potential issues.

Continue Making On-Time Payments to Build Your Credit Score

Whether or not you choose to get on an income-driven repayment plan, it's important to make your student loan payments on time every month. If you're late by 30 days or more, the late payment may get reported to the credit reporting agencies, which could damage your credit score.

As you make payments on your student loans and take other steps to build your credit, use Experian's free credit monitoring service to track your progress and address potential problems as they arise.

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