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Are you drowning in your federal student loan payments? If so, then you may want to consider enrolling in an income-driven repayment (IDR) plan. An IDR plan might be able to get you the lowest monthly payment on your student loans, so your payments can be affordable with your current income.
Before you make the change, you should make sure you understand the different IDR plans and how they will affect your financial situation and your federal student loans. This article is meant to demystify IDR plans for you, so you can figure out the best option for your situation.
The U.S. Department of Education offers income-driven repayment (IDR) plans to student loan borrowers who qualify for them. Just like the federal student aid programs you were offered when you enrolled in school, these plans are meant to help you. These IDR plans can lower your monthly payments to a smaller % of your discretionary income (we will cover more on how this income is calculated). There are four types of IDR plans offered by the U.S. Department of Education that offer different repayment options. Under an IDR plan, you also have the benefit of seeking loan forgiveness after a relevant number of years, though the amount of student loans forgiven is currently taxable.
To qualify for an IDR plan you will need to:
If you have a high student loan outstanding balance and you stick to the default 10-year standard repayment plan, your monthly payment amount will be high. This is tough to pay if you have a lower income compared to your federal student loans. If you are in this situation, an IDR plan can help you since monthly payments are meant to be affordable by taking account your income and family size to calculate your monthly payments.
For example, the IBR repayment plan (one of four IDR plans with different repayment options) will set monthly payments at 10 to 15% of your discretionary monthly income. The U.S. Department of Education calculates discretionary income by getting the difference of your adjusted gross income (or AGI which you can usually find on your federal income tax return that you file with the IRS) and 150% of the annual poverty guideline for a family of your size and in your state. If your discretionary income is calculated as $2,000/month, your monthly payment at 10% of discretionary income would be $200.
There are currently four types of IDR plans. Depending on the type of student loan you have, you can qualify for different plans.
Income-Based Repayment (IBR plan):
Pay As You Earn (PAYE plan):
Revised Pay As You Earn (REPAYE plan):
Income-Contingent Repayment (ICR plan):
You can learn more detail about the different IDR repayment plans.
You should understand the pros and cons of enrolling in an IDR repayment plan before you make the switch. Although an IDR repayment plan can be hugely beneficial if you can’t afford your payments, it can also prolong the length of your loan and the amount you pay in total.
To understand whether an IDR repayment plan is right for you, you should first try to understand your financial situation. Are your monthly student loan payments unmanageable for you? For example, are you getting into extra debt to cover your monthly living expenses, dipping into your emergency savings, or not able to afford your rent? If so, it might make sense to look into an IDR repayment plan so you can get the lowest monthly payment. You can check out Snowball Wealth’s repayment estimator, to see what payment might make sense for you.
You can also consider deferment or forbearance if you want to temporarily stop payment on your federal student loans because you cannot afford them. Either way, it’s important that if you can’t afford your student loan payments you should figure out a way to address this. That way you can make sure you are not late on your payments and your credit score won’t be affected.
For the IBR plan, you are considered a “new borrower” on or after July 1, 2014, if you had no outstanding balance on a Direct Loan or FFEL loan when you received the Direct Loan on or after July 1, 2014.
This post was updated March 4, 2021. Federal repayment programs may be subject to change.