Pros and Cons of Income-Driven Repayment Plans

Income-driven repayment (IDR) describes a collection of individual plans that provide federal student loan borrowers with options beyond the 10-year Standard Repayment Plan. For borrowers who may be having difficulty making their monthly payments, IDR plans provide options other than forbearance to make student loan debt more manageable. Monthly payments under an IDR plan are typically lower than the payments a borrower would make in the Standard Repayment Plan.

Using different formulas, IDR plans set up repayment structures based on a borrower’s adjusted gross income and family size, and also provide a path to eventual forgiveness. If you have federal student loans, there’s a good chance you qualify for more than one type of IDR plan. Which one is right for you will depend on your unique circumstances and financial goals. Let’s look at the types of IDR plans and the pros and cons of each one.

What are the types of IDR?

Under an IDR plan, your monthly student loan payments will be a percentage of your discretionary income and are calculated based on your adjusted gross income and family size. However, that percentage will vary by plan type, and some IDR plans may factor your spouse’s income and their federal student loan debt into the equation as well. Additionally, your eligibility for each plan type will depend on the type of loans you have and when the loans were disbursed. For more information, go to the Federal Student Aid website and see our Guide to Federal Student Loan Repayment Programs.

There are several different types of income-driven repayment plans, including Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR). Read on to learn more about each plan, and compare monthly payment amounts and repayment periods for each plan type here.

Income-Based Repayment (IBR)

IBR is one of the more complicated IDR plans because its features depend on when you first took out your federal student loans. If you took out your loans before July 1, 2014, your payments are capped at 15% of your discretionary income and your remaining loan balance is forgiven after 25 years of payments.

If you took out loans after July 1, 2014, than your payments are capped at 10% of your discretionary income and your remaining loan balance is forgiven after 20 years of payments.

Also note that switching into IBR from the Standard Repayment Plan can take longer and be more complicated compared to other IDR plans. Before switching, you must make a one-time opt-out payment while enrolled in the Standard Repayment Plan, which can be as low as $5.

• Pros: IBR could be a good option if you took out loans after July 1, 2014, don’t expect your income to increase much over time, have grad school debt, and you and your spouse both have incomes.
• Cons: If you only qualify for the older version — sometimes called “Old IBR” — because you took out loans before July 1, 2014, than other IDR plans will most likely be better suited for your needs.

Pay As You Earn (PAYE)

The PAYE plan caps monthly payments at 10% of your discretionary income and offers forgiveness after 20 years of payment.

• Pros: This plan could be a good option if you have a more moderate income and higher debt-to-income ratio, as the lower capped monthly payment could help you manage your loan debt better.
• Cons: The PAYE plan is only available to borrowers who do not have loans prior to October 1, 2007, and who do have loans on or after October 1, 2011.

Revised Pay As You Earn (REPAYE)

The newest IDR pan, REPAYE, became available on December 17, 2015. Like PAYE, the REPAYE plan caps monthly payments at 10% of discretionary income. However, this plan differentiates between undergraduate and graduate student loan debt. For borrowers who never took out any graduate student loans, this plan offers forgiveness after 20 years of payment. For borrowers that do have graduate student loans, the plan offers forgiveness after 25 years of payment.

• Pros: REPAYE could be a good option if you are not eligible for PAYE or only took out undergraduate loans.
• Cons: If you’re married, this plan includes your spouse’s income in its calculation, regardless of whether you file jointly or separately.

Income Contingent Repayment (ICR)

With an ICR plan, the monthly payment calclulation is more complicated compared to plans like PAYE and REPAYE. The ICR monthly payment is either 20% of your discretionary income OR what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income — whichever calculation is lower.

Note that ICR is the only available IDR option for Parent PLUS loan borrowers. Although Parent PLUS Loans can’t be repaid under any of the IDR plans (including the ICR), parent borrowers can consolidate their Direct PLUS Loans or Federal PLUS Loans into a Direct Consolidation Loan and then repay the new consolidation loan under the ICR Plan.

ICR offers an extended repayment period for up to 25 years before forgiveness kicks in, but it also carries higher interest accrual than other plans such as IBR and REPAYE.

• Pros:This type of plan could be a good option for borrowers who took out Parent PLUS loans, or have an income much higher than their federal loan debt.
• Cons: This plan carries higher interest accrual compared to others.

Public Student Loan Forgiveness (PSLF)

Enrollment in one of the four IDR plans above is required if you are pursuing PSLF as a full-time government or nonprofit employee. The key benefit of PSLF is an earlier forgiveness event—10 years of qualifying payments vs. the 20 or 25 years in one of the IDR plans on their own. Additionally, a forgiveness event through the PSLF program will be tax free on the federal level (with potential for taxes on the state level).

How PSLF works

To be eligible for PSLF, you must be employed full-time at a qualifying nonprofit organization or government entity at any level (federal, state, local, or tribal), including the US military. (Note that PSLF plan is not available to federal student loan borrowers working in the private sector.)

If you enroll in PSLF and stay in compliance with program requirements for the duration of you enrollment, you will have the remaining balance of your loans forgiven after ten years of repayment (or 120 qualifying payments) under an Income-Driven Repayment (IDR) plan.

Note that there are currently proposed changes to the PSLF and IDR programs that could change eligibility, requirements, and potentially the amount of money you could save. For more information, visit studentaid.gov or schedule a consultation with a GradFin student loan specialist.¹

You can also learn more about PSLF here as well as in our guide to Understanding Public Service Loan Forgiveness, or on studentaid.gov.

Navigating the PSLF application process

Navigating the requirements of PSLF throughout the application and enrollment process can be challenging. The program is often criticized for its complexity and changing rules. Additionally, fluidity around the federal student loan debt relief plan has led to confusion and misconceptions about applying to the program, making payments, and staying in compliance.

To address the challenges around applying for PSLF, Laurel Road’s student loan specialists at GradFin are available to help you keep up with the changes that apply to your situation and give you peace of mind. Learn more at https://www.laurelroad.com/student-loan-forgiveness/.

Pros and Cons of IDR plans

Given that the variations in plan characteristics can suit different financial situations, lifestyles, and career types, the pros and cons of IDR plans are subjective.

While IDR can help many borrowers with lower income at the beginning of their careers, it’s not for everyone. For example, if you’re a high earner or your student loan amount is low enough that it’s manageable for your budget, then the 10-year Standard Repayment Plan route may make more financial sense. In this case, you could save on the interest that would accrue over an IDR plan’s extended repayment period.

It’s also important to note that you can contact your loan servicer to switch into a different IDR plan whenever your life circumstances change, and you will need to recertify your income and family size each year to remain on any given IDR plan. With that in mind, there are some general benefits and drawbacks to IDR plans overall:

Benefits

In general, the pros of IDR include:

• Lower monthly payments—even as low as a zero payment
• Potential loan forgiveness
• Financial benefits for those who have high debt-to-income ratios or low income

Drawbacks

In general, the cons of IDR include:

• Extended repayment increases the total interest over the life of the loan
• Possibility of larger payments in the future if you experience salary increases

Is IDR right for you?

While you determine if IDR is the right path for you and which plan to choose, the decision often comes down to the fine print. Each plan can carry tax implications, re-qualifying structures, and penalties if two borrowers are married, for example. And depending on your current income and career trajectory, some plans may be better for your long term.

Next steps

To learn more about individual IDR plans, which one would be best-suited for your financial needs, and how to apply, contact our student loan specialists at GradFin¹ for a free 30-minute phone consultation and analysis of your student loans.

Our student loan specialists at Gradfin are well-versed in the details of each IDR plan and can help you understand the right plan for you based on your unique financial profile. Schedule a free consultation to discuss IDR or other repayment options and determine which plan is right for your student loans and employment situation.