What Is an Income-Driven Repayment Plan?

Income-driven repayment (IDR) plans are designed to lower payments on federal student loans by basing your payment amounts on your income and family size. Reducing your payments can help you avoid paying late or defaulting on your loans. For borrowers with low or no income, income-driven repayment may lower your monthly payments down to $0. IDRs do not apply to private student loans.

Types of Income-Driven Repayment Plans

There are four types of income-driven repayment plans:

• Saving on a Valuable Education (SAVE) Plan: This plan was formerly the Revised Pay As You Earn (REPAYE) plan. Under the SAVE plan, your payments are typically 10% of your discretionary income. (Beginning in July 2024, minimum payments under the SAVE plan will drop to 5% of discretionary income.) Your balance is eligible for forgiveness after 20 years if you have only undergraduate debt, or 25 years if part of the debt paid for graduate school.
• Pay As You Earn Repayment (PAYE): With this plan, your payments are typically 10% of your discretionary income and are always less than what you’d pay under the 10-year Standard Repayment Plan. You may qualify for forgiveness in 20 years.
• Income-Based Repayment (IBR): Your payments under the IBR Plan are capped at 10% of your discretionary income if you became a new borrower on or after July 1, 2014, and your repayment term is 20 years. If your first federal student loan predates that, you’ll pay 15% of your income for a maximum of 25 years. Loans in either case are eligible for forgiveness at the end of the repayment term.
• Income-Contingent Repayment (ICR): Under the ICR Plan, your payments will be equal to 20% of your discretionary income or what you would be required to pay on a fixed repayment plan with a 12-year term—whichever is lower. You’re eligible for balance forgiveness in 25 years.

How to Use Income-Driven Repayment to Reduce Your Student Loan Payments

1. Estimate Your Payments

The Federal Student Aid Loan Simulator can help you estimate your payments and compare what you’d pay across plans. Calculating your payments can help you find the best payment plan for you, and it can also help you understand how your payments will affect your balance over time.

2. Consider Balance Forgiveness Taxation

Each income-driven repayment plan is compatible with Public Service Loan Forgiveness (PSLF). If you qualify for PSLF, you’ll only need to make payments for 10 years to be eligible for forgiveness. In contrast, you’ll need to make 20 or 25 years’ worth of payments to qualify for forgiveness through income-driven repayment without PSLF.

3. Factor In Interest

Income-driven repayment plans can put you at risk of negative amortization, which is when your balance grows, rather than shrinks, over time. Negative amortization happens when your monthly payments don’t cover what your loan is accruing in interest.

4. Work With Your Servicer

One easy way to determine which plans you’re eligible for is to ask your loan servicer. You can fill out an application requesting your servicer to put you on whichever of the income-driven repayment plans you qualify for that will set your payments as low as possible.

Additional Ways to Lower Your Student Loan Payments

Consider an Extended Repayment Plan

An extended repayment plan can help you lower your monthly payments by extending your loan term to 25 years. If you don’t qualify for income-based repayment, an extended repayment plan may still be able to help you lower your monthly payments.

Consolidate Your Loans

If you have multiple federal student loans with various interest rates, consolidating your loans through the federal government can streamline your repayment. You may also be able to extend your term up to 30 years, which can help lower your monthly payments. Remember that you’ll pay more in interest over time if you extend your term.

Refinance Your Loans

Refinancing student loans through a private lender may be an option for those with good credit and a stable income. Doing so may help you qualify for a lower interest rate, depending on your credit score. You can check your score for free through Experian.

Make a Plan to Pay Back Student Debt

While a calculator can help you figure out your payments, only you can do the math to determine if a lower payment now will benefit you in the future. Lowering your payments with an income-driven repayment plan may free up cash now, but make sure you understand how what you pay now will impact the cost of your loan long term.

If you need help understanding your options, contact your student loan servicer or a financial advisor who can lay out the financial implications of loan payment plans. A reputable credit counselor may also be able to help you develop a plan for paying off your student loans. If money’s really tight, consider working with a nonprofit that offers no-cost financial assistance.

Contact O1ne Mortgage for Expert Mortgage Services

At O1ne Mortgage, we understand the complexities of managing student loan payments and the impact they can have on your financial health. Our team of experts is here to help you navigate your options and find the best solutions for your needs. Whether you’re looking to refinance your student loans or need advice on income-driven repayment plans, we’re here to assist you.

Call us today at 213-732-3074 for any mortgage service needs. Let O1ne Mortgage be your trusted partner in achieving financial stability and success.