A guide to income-driven repayment plans: Options, how to apply & more

When you took out student loans, you probably planned on making enough money to repay them. Sometimes, however, the job you take makes it difficult to balance your loan responsibilities with everyday living expenses. Particularly as the federal student loan pause that started in March 2020 comes to an end, you may wish you could change the monthly amount you owe to fit better with your budget.

An income-driven repayment (IDR) plan may be able to help you do this. The 10-year Standard Repayment Plan is designed so that you pay off your federal student loans in 120 fixed payments. In contrast, IDR plans can extend your repayment timeline and tailor payments to your earnings, making them more manageable.

Some of these programs are changing as of late summer 2023. One long-standing plan is being replaced and new enrollments are ending for certain plans. Read on to explore the plans, see how they might fit with your financial situation and review other repayment options.

Income-driven repayment plans set you up with an affordable monthly payment amount for your federal student loans based on your income and family size. The specifics across the plans vary, but generally, your payments are capped at a percentage of your discretionary income. After a certain period of making payments—typically 20 to 25 years—the federal government forgives any remaining loan balance. This may trigger a taxable event on the amount forgiven, so you will want to consult with a tax advisor to understand if the tax will apply to you.

These plans can be a lifeline when you have high student loan debt relative to your income and family size. They're a smart consideration if you're experiencing financial challenges or working in a lower-paying field, such as public service, education or nonprofits.

Four IDR plan options are currently available—including the new SAVE plan that replaces REPAYE. They all have similarities but differ in ways that may help you target the just-right payment amount. If you need help deciding which IDR plan is right for you, you can use Federal Student Aid's Loan Simulator tool to compare your estimated monthly payment amounts under each plan.

Formerly called the Revised Pay As You Earn (REPAYE) plan, the SAVE plan caps payments at 5% of discretionary income for undergraduate loans, 10% for graduate loans and a weighted average percentage for those with both. The repayment period is 10 years for low-balance borrowers ($12,000 or less), 20 years for undergraduate loans and 25 years for graduate loans.

The income deduction for this plan is set at 225% of the federal poverty level. For 2023, this means a single person making $32,800 per year or less or a family of four earning $67,500 or less could have their monthly loan payment on the plan drop to $0. Also, when you make scheduled payments on time, the SAVE plan eliminates any remaining interest on that payment rather than rolling it into the principal. This keeps your loan balance from growing due to capitalized interest.

SAVE is available for all borrowers with these eligible loans:

• Direct subsidized and unsubsidized loans
• Direct PLUS Loans made to graduate students (but not parents)
• Direct consolidation loans made to students (but not parents)
• Any FFEL loan made to students (but not parents and only if consolidated)
• Federal Perkins loans (only if consolidated)

This plan sets your monthly payments at 10% to 15% of your discretionary income but not more than what you would have paid under the 10-year Standard Repayment Plan. The repayment period can be 20 or 25 years. The percentage and repayment period depend on when you received your first loan.

IBR plans are only available to borrowers with high student loan debt relative to their income. Eligible loans include:

• Direct and FFEL subsidized and unsubsidized loans
• Direct and FFEL PLUS Loans made to graduate students (but not parents)
• Direct and FFEL consolidation loans made to students (but not parents)
• Federal Perkins loans (only if consolidated)

The ICR plan caps payments at the lesser of 20% of discretionary income or what you would pay under a 12-year fixed repayment plan, adjusted according to your income. The repayment period is 25 years.

Currently, any borrower with an eligible loan can apply. But starting in July 2024, the ICR program won't allow new enrollments for students, although it remains an option for Direct Consolidation Loans involving PLUS Loans made to parents.

Eligible loans include:

• Direct subsidized and unsubsidized loans
• Direct PLUS Loans made to graduate students (and to parents of undergraduates only if consolidated)
• Direct consolidation loans (including ones that repaid PLUS Loans made to parents)
• Any FFEL loan made to students (and to parents only if consolidated)
• Federal Perkins loans (only if consolidated)

PAYE caps your monthly payments at 10% of your discretionary income but not more than what you would have paid under the 10-year Standard Repayment Plan. It has a repayment period of 20 years.

Starting in July 2024, the plan won't be taking any new enrollments. But for now, PAYE is available to new borrowers with high student loan debt relative to their income.

Eligible loans include:

• Direct subsidized and unsubsidized loans
• Direct PLUS Loans made to graduate students (but not parents)
• Direct consolidation loans made to students (but not parents)
• Any FFEL loan made to students (but not parents and only if consolidated)
• Federal Perkins loans (only if consolidated)

Choosing the most advantageous IDR plan depends on your circumstances. Some key factors to consider include your current and projected income, your current or future marital status, any anticipated upcoming major expenses, among others.

If you anticipate a significant increase in your income in the future but want to keep payments low, you may want to choose a plan that caps your monthly payment. Under the PAYE and IBR plans, say your income increases to the point that your calculated monthly payment would be more than you'd pay under the 10-year Standard Repayment Plan. In that case, your required monthly payment would be the amount you'd pay under the Standard Repayment Plan.

All IDR plans factor in your spouse's income if you file your federal income tax return together as "married filing jointly." The SAVE plan considers both your and your spouse's income and loan debt whether you file jointly or separately. However, the IBR, ICR and PAYE plans only consider your income when calculating monthly payments if you file separately from your spouse.

Opting for one of these plans and filing a separate return can keep your payments low—especially if you have a high-earning spouse. However, filing separate returns can sometimes lead to higher taxes, so discuss this option with your tax advisor.

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Dive deeper

Applying for an income-driven repayment plan is a straightforward process you can complete online. Here are the steps to follow:

Log in to Federal Student Aid to apply for or manage an IDR plan.

Be ready to provide your federal loan details and other financial information, including tax returns, bank statements or other documents to confirm your income.

You can specify the IDR plan you want to apply for. Or you can request that your loan servicer place you on the IDR plan with the lowest monthly payment you're eligible for.

Review your information as well as the plan's terms and conditions before submitting.

Continue to make payments under your current plan until you receive confirmation that your IDR plan has been approved.

Once you have an IDR plan, you can't just set it and forget it. You need to recertify every year and provide updated income documentation and family information. If these have changed dramatically, you may no longer qualify and need to evaluate other repayment options.

Usually, you'll receive a notice from your servicer alerting you that it's time to recertify using the Federal Student Aid website. If you don't recertify on time, your monthly payments revert to the amount you'd pay under the 10-year Standard Repayment Plan. Additionally, any unpaid interest could be added to your loan principal, increasing the compounded total you pay over time.

Applying for an IDR plan is a free process. Avoid companies that charge fees to assist with the application as they may be scam operations. If you need assistance, contact your loan servicer; it's there to help you navigate the process.

Never give out your Federal Student Aid ID number or password to anyone—even if they promise to help with your student loans. This information could allow the person or company to change your student loans on your behalf.

If an IDR plan isn't the right fit for your financial circumstances, you may want to look into other repayment alternatives:

• Graduated repayment plan. Start with lower payments that increase every two years.
• Extended repayment plan. Repay your loans with fixed or graduated payments over up to 25 years.
• Consolidation. Combine multiple federal student loans into one monthly payment with a single loan servicer.
• Deferment. Delay making payments for up to three years, with the government paying the interest on any subsidized loans in the meantime.
• Forbearance. Suspend or reduce your payments for up to 12 months, though interest will keep accruing.
• Refinancing with a private lender. You may be able to find a private student loan with competitive rates and terms. Just keep in mind that refinancing with a private lender means losing out on certain federal loan benefits, such as future access to IDR plans and loan forgiveness.

Resuming paying your student loans after years of suspended payments can throw your monthly budget for a loop. If your current repayment plan is no longer feasible, consider exploring income-driven payment options to keep making payments while still staying afloat financially. Consider reaching out to a Thrivent financial advisor. They can help strategize repayments as part of your overall financial strategy.