Should you apply for an income-driven repayment plan?

Income-driven repayment plans are repayment options offered by the federal government for federal student loans only. With these plans, you’ll pay a percentage of your discretionary income for a set period, at which point your remaining balance will be forgiven.

Around 28.5 percent of student borrowers are currently enrolled in an income-driven repayment plan, according to 2024 data from the Office of Federal Student Aid. If you’re struggling with your federal student loan payments, an income-driven repayment plan may be right for you, though there are some caveats to keep in mind before you sign up.

What are the most common income-driven repayment plans?

The four most common federal income-driven repayment plans are Pay As You Earn (PAYE), Saving on a Valuable Education (SAVE), Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR). Students with federal Direct Loans may qualify for all the plans — although parents only qualify for ICR, and only if they consolidate those loans.

Each of the four income-driven repayment plans comes with its own monthly payment and terms. Compare the existing plans to find what best fits you, but know that PAYE and ICR are not accepting new applicants.

Pros and cons of income-driven repayment plans

While it may appear that an income-driven repayment plan is an obvious choice for borrowers who are struggling, it’s important to note both the benefits and drawbacks before you apply.

Pros

• More affordable payment: An income-driven repayment plan can lower your monthly payments by a sizable amount. Low-income borrowers could have payments as low as $0.
• Potential for forgiveness: If you still have a balance at the end of your new repayment term, it’ll be forgiven.
• No credit score impacts: Credit checks aren’t required to enroll in an income-driven repayment plan.

Cons

• Your balance may increase: If your monthly payments are less than the accrued interest, this amount may be added to your loan balance, leading to higher payments if you leave the income-driven repayment plan.
• You must reapply every year: The Department of Education recertifies your income and family size annually. Missing the deadline puts you back on the standard repayment plan.
• Complex eligibility: If you have student loans from the Federal Family Education Loan (FFEL) Program or if you’ve taken out a parent loan, you’ll need to consolidate your loans before you can apply for most income-driven repayment plans. Factors like disbursement dates and marital status could also limit your options.

Is an IDR plan worth it?

Income-driven repayment isn’t right for everyone. When evaluating your options, think carefully about your situation and your goals before deciding to enroll in an income-driven repayment plan or any other plan for your student loans. That said, there are some situations where it’s worth considering.

• Your student loan payments are high compared to your income: Because income-driven repayment is based on your actual income, you could save hundreds of dollars each month by switching plans.
• You qualify for the Public Service Loan Forgiveness (PSLF) program: Income-driven repayment plans are a requirement for PSLF, which forgives remaining student loan balances for workers in public service jobs after 10 years.
• You’ve recently lost your job or had your salary reduced: Income-driven repayment plans ask you to recertify your income every year, so your payments could rise or fall depending on what you’re actually earning.
• You’re near the beginning of your student loan repayment plan: Income-driven repayment will start a new repayment plan that typically lasts 20 or 25 years. If you have only a few years or a low balance left on your student loans, it may not make sense to extend that period.

How to choose an IDR plan

Income-driven repayment plans have very specific criteria. Choose the right one for you by considering the eligibility requirements.

• The IBR plan will result in the lowest monthly payment, as a federal injunction has halted the full implementation of the SAVE plan and the PAYE plan is no longer accepting new applicants.
• If you expect your income to increase significantly, the IBR plan caps your monthly payments based on what you’d pay on a 10-year repayment plan.
• If you have parent PLUS loans, your only option is the ICR plan — and only if you consolidated them.

What is the income requirement for IDR?

Income-driven repayment plans base your monthly payment on your discretionary income. For PAYE, REPAYE and IBR plans, this figure is calculated by taking the difference between your annual household income and 150 percent of the federal poverty guideline for your household size and state of residence. If you’re on the ICR plan, it’s 100 percent of the guideline. With SAVE, it’s 225 percent.

If your income is at or below the calculation for the federal poverty guideline, you may not have a monthly payment at all. Even if it’s higher, you may still be able to score a lower payment than you have right now. You can use the Department of Education’s loan simulator to get an idea of what your payment might be.

Bottom line

Exploring income-driven repayment plans can help you to reach more affordable monthly payments on your federal student loans. Though determining your eligibility initially and recertifying your income each year can be a minor hassle, you may be able to free up room in your monthly budget by switching to an income-driven repayment method.

While it is possible to refinance with a private lender to lower your payments if you don’t qualify for IDR, you will lose all federal protections and the potential for forgiveness. Check current student interest rates and consider whether you may need protections in the future before refinancing.