What is an Income-Driven Repayment Plan?

If you are a recent college graduate, you’re likely trying to sort out how you’ll pay back your student loans.  If you were lucky enough to land a really high-paying job right away, this probably won’t be an issue for you. But if you’re like most recent grads, you’ll be struggling financially for a little while.

Enter the Income-Driven Loan Repayment Plan

If you received federal student loans, you may be eligible to repay them under an income-driven repayment plan.  To apply for one of these plans, you must provide income information. There are currently four types of income-driven repayment plans:

  • Revised Pay As You Earn Repayment Plan (REPAYE Plan)
  • Pay As You Earn Repayment Plan (PAYE Plan)
  • Income-Based Repayment Plan (IBR Plan)
  • Income-Contingent Repayment Plan (ICR Plan)

With any of these plans, if your income is low enough, you won’t have to make a monthly payment at all.  This is great news for anyone who’s unemployed or really struggling to make ends meet. As your income increases, you’ll have to keep your loan servicer informed. Your monthly payments will increase as your ability to pay them increases.

Are You Eligible?

If you have an eligible federal student loan you can apply for an income-driven repayment plan. Eligible student loans (at the time of the writing of this article) include Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans made to graduate or professional students, Direct Consolidation Loans that did not repay any PLUS loans made to parents, Direct Consolidation Loans that repaid PLUS loans made to parents (ICR Plan only), Subsidized Federal Stafford Loans (from the FFEL Program, for REPAYE, PAYE, and ICR, eligible only if consolidated), Unsubsidized Federal Stafford Loans (from the FFEL Program, for REPAYE, PAYE, and ICR, eligible only if consolidated), FFEL PLUS Loans made to graduate or professional students (for REPAYE, PAYE, and ICR, eligible only if consolidated), FFEL Consolidation Loans that did not repay any PLUS loans made to parents (for REPAYE, PAYE, and ICR, eligible only if consolidated), and Federal Perkins Loans (eligible only if consolidated).




Pros and Cons of Income-Driven Repayment Plans

The immediate benefit, obviously, of an income-driven repayment plan, is that your monthly payment can be lowered or eliminated. This is great news for people who are financially stressed. If you continue to be a low-income earner for a long period of time, it’s possible for your loan to be forgiven, which is a great longer term benefit.

A word of caution, though – the downside to having your loan forgiven after a long period of being low income is that under current IRS rules, the forgiven loan is considered income and taxed accordingly.

How To Apply for an Income-Driven Repayment Plan

To apply, you must submit an Income-Driven Repayment Plan Request. You can obtain this request form from your loan servicer, or you can submit the request electronically at studentloans.gov. You’ll need to provide income information, including your AGI (adjusted gross income).

Additional Resources