Laurel Road: Exploring Income-Driven Repayment Plans for Low Earners

An Income-Driven Repayment plan (IDR) allows student loan borrowers to lower their monthly payments based on their salary and family size. These plans can help borrowers manage their student loan payments when their salary makes standard payment plans difficult to manage.

Aside from the obvious benefit of lowering monthly payments, borrowers enrolled in an IDR plan may be eligible for loan forgiveness after 20 to 25 years, depending on factors such as how much they owe when applying for forgiveness, or whether their student loan debt is from graduate or undergraduate education.

The IDR program offers four plans that borrowers might consider, and the differences between them can occasionally be challenging to parse. Read on for breakdown of the four plans, including some of their similarities and notable differences:

Income-Based Repayment (IBR) 

IBR allows borrowers to limit their monthly payments to 10% or 15% of their discretionary income—depending on the age of the loan.

Discretionary income is determined as the difference between 150% of the poverty guideline for the borrower’s location and family size and their Adjusted Gross Income (AGI).

To qualify, the required payment would be lower than what they would pay under the standard 10-year repayment plan.

Pay As You Earn (PAYE) 

PAYE restricts monthly payments at 10% of the borrower’s discretionary income and offers an extended repayment period of up to 20 years before borrowers must pay off their remaining balance.

As with IBR, discretionary income is based on 150% of the poverty guideline amount.

PAYE is one of the most popular plans because of its lower payment amount and shorter repayment period compared to other plans.

Spotlight: What Differentiates IBR and PAYE from Other IDR Plans?

With the IBR and PAYE plans, a borrower’s monthly payments would initially be based on income and family size. If and when the borrower’s income increases enough that the calculated monthly amount exceeds that of the 10-year standard repayment plan, they could remain on IBR or PAYE—but payments would no longer be based on income. Instead, required monthly payments would revert to the 10-year standard repayment plan, based on how much the borrower owed when they first started repayment under their PAYE or IBR plan.

This means that for the life of the loan, monthly payments could not exceed the standard 10-year repayment plan, therefore offering some assured stability to borrowers. They would also have the option to recertify their income and family size to adjust monthly payments once again.

Income-Contingent Repayment (ICR) 

Another IDR plan is ICR, which restricts monthly payments to 20% of a borrower’s discretionary income and offers an extended payment period of up to 25 years.

Discretionary income for an ICR plan is calculated based on 100% of the poverty guideline rather than 150%.

Although IBR and ICR plans are similar, ICR plans do not require borrowers to earn a low income— any borrower with eligible federal student loans could qualify.

Revised Pay As You Earn (REPAYE) 

REPAYE offers similar benefits as PAYE, but graduate school borrowers are also eligible for this program.

The plan generally restricts monthly payments at 10% of discretionary income and extends repayment periods up to 20 years for undergraduate borrowers or 25 years for graduate borrowers. Like with ICR, any borrower with eligible student loans could take advantage of REPAYE.

Spotlight: What Differentiates ICR and REPAYE from Other IDR Plans?

With ICR and REPAYE plans, a borrower’s monthly payments are always income-based and account for family size. So, if the borrower’s income increases over time, monthly payments might, in some cases, be higher than what they would have to pay under the 10-year standard repayment plan.

Final Thoughts

Through the various income-driven repayment plans offered by the Department of Education, those with student loans could create a payment plan that works even with the tightest budgets.

Any borrower with federal student loans might consider exploring one of the IDR plans, including IBR, PAYE, ICR, or REPAYE.

Borrowers should consider their unique circumstances and consult experts when reviewing the various options available to find one that works best for them.