Lana Oconnell
The federal government offers income-driven repayment plans to help borrowers manage their student loan debt. These plans, also known as IDR plans, allow borrowers to make lower monthly payments based on their income and family size. The IDR plans include Income-Based Repayment (IBR), Pay As You Earn (PAYE), Saving on a Valuable Education (SAVE), and Income-Contingent Repayment (ICR). Each plan has different eligibility requirements and payment calculations, but they all aim to make student loan repayment more affordable and accessible. While the SAVE plan is currently on hold due to legal challenges, other IDR plans continue to provide borrowers with options for managing their student loan debt.
| Characteristics | Values |
|---|---|
| Name of the system | Income-Driven Repayment (IDR) plan |
| Who can apply | Borrowers with federal student loans |
| Types of IDR plans | Income-Based Repayment (IBR), Pay As You Earn (PAYE), Income-Contingent Repayment (ICR), Saving on a Valuable Education (SAVE) Plan |
| Monthly payment | Based on income and family size |
| Payment amount | Capped at a certain percentage of discretionary income or the amount paid under the 10-year Standard Repayment Plan |
| Payment adjustment | Annual |
| Documentation | Documentation of income and family size must be submitted annually to remain in the program |
| Interest capitalization | No interest capitalization when leaving IDR except for the IBR Plan |
| Forgiveness | Remaining loan balances are forgiven after making payments for 20 or 25 years |
| Eligibility | Depends on the type of loan, date of borrowing, and outstanding loan balance |
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What You'll Learn
Income-Based Repayment (IBR)
The IBR program is one of four income-driven repayment (IDR) plans. The monthly payment under IBR is calculated as the lesser of a certain percentage of discretionary income or the amount paid under the 10-year Standard Repayment Plan. The percentage of discretionary income used is either 10% or 15%, depending on when the loan was taken out and whether the borrower had existing federal student loans. For example, if you borrowed your first loan before July 1, 2014, and had no outstanding balances on a federal student loan when you received the new loan, the percentage of your discretionary income used to calculate your monthly payment would be 15%.
Borrowers must submit documentation to their servicer each year to remain in the IBR program. The IBR program also includes a limited subsidized interest benefit. If a borrower's payments do not cover the accruing interest, the government pays or waives the unpaid interest on subsidized Stafford loans for the first three years of income-based repayment. Additionally, any remaining loan balances are forgiven after 25 years of payments (10 years for public service).
The IBR program is beneficial for borrowers with low incomes, as it often provides the lowest monthly payment compared to other repayment plans. However, it is important to note that the IBR program will no longer be available to new borrowers starting in July 2026, and current borrowers must switch to another plan by July 1, 2028.
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Pay As You Earn (PAYE)
The Pay As You Earn (PAYE) plan is an income-driven repayment (IDR) plan that caps federal student loan payments at a percentage of one's discretionary income. This plan is best for those who expect to earn a high income in the future, spouses with two incomes, and those with grad debt or high earning potential.
To qualify for PAYE, you must have borrowed your first federal student loan after October 1, 2007, and a Direct Loan or Direct Consolidation Loan after October 1, 2011. Additionally, you must have federal direct loans and a partial financial hardship.
Under PAYE, your monthly payment is adjusted annually based on your income and family size. The repayment period is typically 20 years, after which any remaining loan balance is forgiven. PAYE is one of the income-driven repayment plans offered by the U.S. Department of Education, along with Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR).
The Saving on a Valuable Education (SAVE) Plan is the newest income-driven repayment (IDR) plan, which replaced the Revised Pay As You Earn (REPAYE) Plan in 2023. Borrowers who switch from SAVE to PAYE will resume earning credit toward Public Service Loan Forgiveness or income-driven repayment forgiveness.
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Income-Contingent Repayment (ICR)
Income-driven repayment (IDR) plans allow borrowers to make lower monthly payments on their federal student loans based on their income and family size. One such IDR plan is the Income-Contingent Repayment (ICR) plan, which is designed to make repaying education loans easier for students who intend to pursue jobs with lower salaries, such as careers in public service.
The ICR plan is one of four IDR plans, including the Income-Based Repayment (IBR) and Pay As You Earn (PAYE) plans. Under the ICR plan, the monthly payment amount is pegged to the borrower's income, family size, and total amount borrowed. The payment amount is adjusted annually to reflect changes in the borrower's income and family size.
Any borrower with an eligible federal student loan can make payments under the ICR plan. This plan is the only income-driven repayment option for Parent PLUS loan borrowers. Although Parent PLUS loans cannot be repaid under any IDR plans, parent borrowers may consolidate their Direct PLUS or Federal PLUS loans into a Direct Consolidation loan, which does qualify for the ICR plan.
The ICR plan has a 25-year repayment term, which may be intimidating to some borrowers. However, borrowers are not locked into this payment plan and can adjust their monthly payments if needed. The total amount repaid over the lifetime of the loan is only slightly more expensive than that of a 25-year extended repayment plan but can be significantly cheaper on a constant dollar basis. Additionally, a new public service loan forgiveness program will discharge any remaining debt after 10 years of full-time employment in public service, provided the borrower has made 120 payments under the Direct Loan program.
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Saving on a Valuable Education (SAVE) Plan
The Saving on a Valuable Education (SAVE) Plan is an income-driven repayment (IDR) plan for federal student loans. It was introduced in August 2023, replacing the Revised Pay As You Earn (REPAYE) Plan.
The SAVE Plan is designed to make monthly payments more affordable for borrowers. It caps monthly payments at a portion of an individual's income and forgives remaining debt after a set number of payments. The threshold for discretionary income is set at 225% of the federal poverty guideline, with undergraduate loan repayments set at 5% of this discretionary income. This means that borrowers with undergraduate loans pay significantly less compared to other IDR plans, which typically require a minimum of 10% repayment of discretionary income.
The SAVE Plan also simplifies the application process. Individuals can grant the Education Department access to their IRS information, allowing tax and family size details to be automatically considered for their IDR application. This automatic integration removes the need for manual recertification of income and family size each year.
However, it is important to note that the SAVE Plan has faced legal challenges. As of July 2024, lawsuits have resulted in the plan being temporarily suspended, placing SAVE borrowers in an indefinite administrative forbearance. Additionally, under the Trump administration's budget reconciliation bill, the SAVE Plan, along with other IDR plans, will no longer be available to new borrowers after July 1, 2026. Existing borrowers will need to transition to the Income-Based Repayment (IBR) plan by July 1, 2028, to remain on an income-driven repayment path.
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How to qualify for PAYE
The Pay As You Earn (PAYE) student loan repayment plan is an income-driven repayment program designed by the Department of Education to help federal student loan borrowers who struggle with monthly payments. The PAYE program was enacted in 2012 as part of President Obama's first student debt relief law.
To qualify for PAYE, you must have borrowed your first federal student loan after October 1, 2007, and you must have borrowed a Direct Loan or a Direct Consolidation Loan after October 1, 2011. Additionally, you will need to recertify your income and family size annually to continue qualifying for the PAYE plan. This means your monthly payments may change over time.
The PAYE plan calculates your monthly payment amount based on your monthly adjusted gross income and family size. Payments are limited to a maximum of 10% of your discretionary income or the amount you would pay under the standard repayment plan, whichever is lower. Discretionary income is defined as the difference between your annual income and 150% of the poverty level for your family size and state of residence.
You can determine whether you qualify for PAYE by checking the Department of Education's Loan Simulator. If you have older federal loans, you may need to contact your loan servicer directly to enroll in an income-driven repayment plan.
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Frequently asked questions
An income-driven repayment plan allows you to make lower monthly payments on your federal student loans based on your income and family size.
The four types of income-driven repayment plans are Saving on a Valuable Education (SAVE), Pay As You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).
To qualify for an income-driven repayment plan, you must have a federal student loan. You can apply online or by contacting your loan servicer directly.
You can enroll in an income-driven repayment plan by visiting the U.S. Department of Education's online IDR plan enrollment website or by calling your loan servicer.
The main difference between the plans is the percentage of your discretionary income that is used to calculate your monthly payment. For example, under the SAVE plan, repayment for undergraduate loans is set at 5% of discretionary income, while for other IDR plans, it is typically 10%.
