The Ultimate Guide to Income-Driven Repayment (IDR) Plans

The good thing about having federal student loans is that you have various repayment options. The downside? There are a lot of plans to choose from and it can be tough to know which is best for you.

One term you may have come across is “income-driven repayment.” In this guide, we’ll share everything you need to know about what it is, what it’s not, and how it can work for you.

What is an income-driven repayment plan?

When people hear the term “IDR” it can often be misconstrued as a repayment plan. It sounds pretty close to “IBR” which is the income-based repayment plan but the term income-driven repayment (IDR) is the category of repayment plans that are based on your income.

Income-driven repayment (IDR) refers to the four student loan repayment options that are based on a percentage of your income (which we’ll get into below). Under this category, your repayment is a monthly payment that’s more manageable and affordable — ideally, less than what your monthly payment is on the 10-year Standard Repayment Plan.

A Standard Repayment Plan is the default plan that’s set when you start paying back your loan. This plan has a repayment term of 10 years and the monthly payments are set accordingly.

If those payments are too high, an income-driven repayment plan lowers your monthly payments, based on your family size and your income. IDR plans are only available to federal student loan borrowers.

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Which plans fall under income-driven repayment?

The four IDR plans consist of:

• Income-Based Repayment (IBR)
• Income-Contingent Repayment (ICR)
• Pay As You Earn (PAYE)
• Saving on a Valuable Education (the SAVE plan, formerly REPAYE)

All of these plans differ in the amount you’d owe each month as well as eligibility requirements. Let’s take a deeper look.

IBR

The IBR plan has been around since 2009. It has two versions of the plan depending on when you borrowed money.

For example, if you’re a new borrower from July 1, 2014, and after, you’ll pay 10% of your income. If you’re not a new borrower after that time, you’ll pay 15% of your income.

Your repayment term will also change. New borrowers after July 1, 2014, have a repayment term of 20 years. If you’re not a new borrower after that period, your repayment term is 25 years. To be eligible, a borrower's monthly payment amount under this plan must be less than what your payment would be on the Standard Repayment Plan.

Percent of income as monthly payment: 10% to 15%
Repayment term: 20 to 25 years
Eligible loans:

• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Direct PLUS loans to grad students
• Direct Consolidation Loans (that is not from a PLUS loan for parents)
• Subsidized Federal Stafford Loans (from FFEL)
• Unsubsidized Federal Stafford Loans (from FFEL)
• FFEL PLUS loans to grad students
• FFEL Consolidation Loans (that is not from a PLUS loan for parents)
• Federal Perkins Loans (if consolidated)

Not eligible:

• Direct PLUS loans made to parent
• Direct Consolidation Loans that repaid PLUS loans to parents
• FFEL PLUS loans to parents
• FFEL Consolidation Loans made to parents

Under IBR, if your monthly payments don’t cover all of the interest on your subsidized loans, the government will pay the rest for the first three years. However, it doesn’t cover the interest on unsubsidized loans.

ICR

Income-contingent repayment (ICR) is like the grandfather of IDR plans, dating all the way back to 1994 when it began. ICR bases its monthly payments on your income or based on a fixed amount over 12 years — whichever is lower.

The ICR plan has the highest percentage of income and the longest repayment term. But all types of loans are eligible under this plan, some of which are eligible after consolidation. What that means is that if it requires consolidation, you’d use a Direct Consolidation Loan and then be eligible for this repayment plan.

Borrowers with Parent PLUS loans can only use this plan under the income-driven repayment plan umbrella (unless they take advantage of the Parent Plus double consolidation loophole). Also, ICR has no federal subsidies for interest.

Percent of income as monthly payment: 20% (or based on a fixed amount over 12 years, based on your income, whichever is less)
Repayment term: 25 years
Eligible loans:

• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Direct PLUS loans to grad students
• Direct PLUS loans made to parent (if consolidated)
• Direct Consolidation Loans (including loans repaid toward a PLUS loan for parents)
• Subsidized Federal Stafford Loans (from FFEL — if consolidated)
• Unsubsidized Federal Stafford Loans (from FFEL — if consolidated)
• FFEL PLUS loans to grad students (if consolidated)
• FFEL PLUS loans to parents (if consolidated)
• FFEL Consolidation Loans, if consolidated (including loans repaid toward a PLUS loan for parents)
• Federal Perkins Loans (if consolidated)

In this case, the only way that some of these loans wouldn’t be eligible for the ICR plan is if they aren’t consolidated. The only loans with an exception to this requirement include Direct Subsidized, Direct Unsubsidized, Direct PLUS loans for graduate or professional students.

PAYE

Pay As You Earn (PAYE) is only for new borrowers who took on a Direct Loan after October 1, 2007, and had a disbursement on October 1, 2011, or after. You are not eligible if you had an outstanding balance before this period.

Additionally, similar to IBR, your payments under this plan must be less than what they would be on a Standard Repayment Plan.

Percent of income as monthly payment: 10%
Repayment term: 20 years
Eligible loans:

• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Direct PLUS loans to grad students
• Direct Consolidation Loans (that is not from a PLUS loan for parents)
• Subsidized Federal Stafford Loans (from FFEL — if consolidated)
• Unsubsidized Federal Stafford Loans (from FFEL — if consolidated)
• FFEL PLUS loans to grad students (if consolidated)
• FFEL Consolidation Loans (that is not from a PLUS loan for parents — if consolidated)
• Federal Perkins Loans (if consolidated)

Not eligible:

• Direct PLUS loans made to parents
• Direct Consolidation Loans that repaid PLUS loans made to parents
• FFEL PLUS loans to parents
• FFEL Consolidation Loans that repaid PLUS loans made to parents

Under PAYE, if your monthly payments don’t cover all of your interest on your subsidized loans, the government will pay the remaining interest for the first three years. Again this subsidy doesn’t cover unsubsidized loans.

It's important to note that President Biden and the U.S. Department of Education are transforming the IDR student loan repayment plans, with the launch of the new plan, SAVE. So the PAYE payment plan won't be eligible for enrollment after July 2024.

SAVE (formerly REPAYE)

The Saving on a Valuable Education (SAVE) plan — formerly the Revised Pay As You Earn (REPAYE) program — is available to all eligible borrowers. Unlike PAYE, which has borrower restrictions with income and when you got the loan, REPAYE can be used by everyone.

The good news about SAVE is that it also includes the most robust federal subsidies among IDR plans, in the event that your monthly payment doesn’t cover all of your accrued interest.

According to StudentAid.gov, the SAVE plan eliminates all remaining interest on both subsidized and unsubsidized loans after you make a payment. That means you won't be responsible for unpaid interest and your remaining loan balance won't grow.

Percent of income as monthly payment: 5% to 10%, based on undergraduate vs graduate loans
Repayment term: 20 years (if only paying undergraduate loans) or 25 years (if loans are from graduate school)
Eligible loans:

• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Direct PLUS loans to grad students
• Direct Consolidation Loans (that is not from a PLUS loan for parents)
• Subsidized Federal Stafford Loans (from FFEL — if consolidated)
• Unsubsidized Federal Stafford Loans (from FFEL — if consolidated)
• FFEL PLUS loans to grad students (if consolidated)
• FFEL Consolidation Loans (that is not from a PLUS loan for parents — if consolidated)
• Federal Perkins Loans (if consolidated)

Not eligible:

• Direct PLUS loans made to parent
• Direct Consolidation Loans that were paid with PLUS loans to parents
• FFEL PLUS loans to parents
• FFEL Consolidation Loans made to parents

SAVE can be useful to score subsidies that help save on interest. Additionally, there's another great change. As part of this new loan repayment program replacing REPAYE, SAVE excludes a spouse's income if you're married and file separately.

What you should know about income-driven repayment

As you can see, there are various eligibility requirements, repayment terms and income percentages among the four income-driven repayment plans.

If you’re wondering what might be the best fit, contact your loan servicer. You can also use the Department of Education’s Repayment Estimator to calculate various monthly payments under each plan.

While income-driven repayment can be useful to manage student loan debt, there are things you should know before jumping on the IDR train.

You’ll pay more in interest

Due to the longer repayment periods, your monthly payments are much lower under IDR. While that part can be nice, it can mean paying a whole lot more in interest — thousands of dollars more.

Student loan forgiveness

The good news is that all of these plans are eligible for student loan forgiveness. Let’s say that you still had a loan balance due after you’ve fulfilled your 20 to 25-year repayment term. Any amount that’s left is forgiven.

Uncle Sam can get you

Getting your student loans forgiven under an income-driven repayment plan seems like a great way out of debt. But there’s one big consideration that can foil your carefree plans.

The IRS may consider the amount that’s forgiven as taxable income. In other words, you might be on the hook for paying taxes on your forgiven loans. Yes, you won’t pay your student loans in full with all that crazy interest, but you could end up paying a significant amount in taxes. As of now, student loan forgiveness isn't taxed until 2025.

You must apply

In order to get on an income-driven repayment plan, you have to fill out the Income-Driven Repayment Plan Request form. You won’t automatically be put on IDR so start the paperwork ASAP if you need to lower your payments. Getting a lower payment can help you stay in good standing and avoid delinquency or default on your loans.

You must recertify each year

Once you’re approved for IDR, you’ll pay under your specific plan based on the required income percentage as well as your family size. However, each year you have to recertify and update any changes to your income and family size.

Failing to do this could revert your loans back to the Standard Repayment Plan in some cases so recertify before the deadline to avoid any mishaps.

Common mistakes under an income-driven repayment plan

On IDR, you can successfully lower your payments and make them more affordable, but there are some mistakes that borrowers could make that can be costly.

1. Being on the wrong plan

While all of the plans can lower your monthly payments, it’s important to know some of the nuances that can work in your favor. For example, being aware of the interest subsidies available with certain plans.

SAVE has the most lucrative federal subsidies compared to IBR and PAYE. So if your payments aren’t covering interest and you’re on PAYE you could be paying more when you could get additional help on REPAYE.

Use our student loan calculator to look at what your monthly payments would be under each plan and see which is most cost-effective.

2. Not considering marital status

If you’re married, IDR can be a whole different ball game. How you file your taxes when you’re married affects your monthly payments.

That’s not the case for PAYE, IBR or ICR. Under these three programs, your spouse’s income is only considered if you file jointly.

It’s important to do the calculations and determine which route is best, given your marital status and how you file your taxes.

Discuss the benefits of filing separately or jointly with your spouse and calculate your potential monthly student loan payments to see what makes the most sense.

3. Not saving for taxes

Your payment is so much more manageable under IDR but as noted above, a tax bill could be in your future if you’re hoping to take advantage of student loan forgiveness. Create a separate tax savings account and start saving little by little to avoid an unexpected surprise from the IRS.

Start a tax savings account that is hard to reach and put a little away each paycheck.

4. Not understanding how the payments are calculated

If you’re on an IDR plan, you may wonder how exactly are your payments calculated? By now, you’re aware of the percentage of your income your monthly payments might take up but is that calculation based on net or gross income? What other factors come into play?

Actually, the amount you pay is based on your discretionary income. There’s actually an exact formula used so you have a better understanding of how this is calculated.

For IBR and PAYE the discretionary income calculation is: your adjusted gross income (AGI), which you can find on your tax returns, is subtracted by 150 percent of the poverty guideline limits for your state and family size. For SAVE, the 150 percent goes up to 225 percent.

Under ICR, the calculation is slightly different:

Your adjusted gross income (AGI), which is found on your tax returns, is subtracted by 100 percent of the poverty guideline limits for your state and family size.

For ICR your monthly payments either come from this formula or based on what you would end up paying on a Standard Repayment Plan across a 12-year term, which is then adjusted based on your loan information and the current formula. Your exact payment will be the lesser of these amounts.

Who should use IDR?

IDR really should only be used if you’re struggling to make payments on your federal student loans. If you can reasonably afford the Standard Repayment Plan, that’s the best option. You’ll get out of debt faster and save money on interest, too.

For borrowers who have a low income and high payments, monthly payments under IDR can be a huge relief. If your income is very low with super high payments, your IDR monthly payment could be zero dollars－really! Not only will your monthly payment be zero dollars, but you’ll also still be in good standing on your loans.

Submitting the income-driven repayment application

If you want to apply for an income-driven repayment plan, take the following steps.

Step 1: Contact your loan servicer about your eligibility and to identify the best plan for you.

Step 2: Submit an income-driven repayment application using the Income-Driven Repayment Plan Request form on StudentLoans.gov.

Step 3: Submit income verification (this could be a tax return or pay stubs or a written statement indicating that you’re not working on your application) along with the income-driven repayment form.

Step 4: Wait for approval. Continue to pay as usual or see if your loan servicer can put you on a temporary forbearance.

Step 5: If approved, start making payments under your specific IDR plan with your new monthly payment.

Step 6: Recertify annually with the income-driven repayment form to stay in good standing with IDR.

Taking these steps, and considering all of the above information, can help you get on an income-driven plan. If you’re still uncertain about which is the better income-driven repayment plan for you, consider speaking with one of our advisors to help you navigate through your options.