Income-Driven Repayment Plans: How they work, who qualifies, and benefits of enrollment

It’s no secret that many Americans are on edge about the upcoming end of the student loan pause. With 1 in 7 Americans still holding a student loan and a potential recession around the corner, many are looking for ways to afford loan payments. Loan borrowers, meet Income-Driven Repayment Plans.

Income-driven repayment plans offer relief to student loan holders that struggle to make ends meet. There are many types of ICR Plans, and some can only be accessed by people with specific financial situations.

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Types of Income-Driven Repayment Plans

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The four major types of income-driven repayment plans are:

• Revised Pay As You Earn Repayment Plan (REPAYE Plan) 
• Pay As You Earn Repayment Plan (PAYE Plan) 
• Income-Based Repayment Plan (IBR Plan) 
• Income-Contingent Repayment Plan (ICR Plan)

Common Features

• On any of these plans, monthly payments will be adjusted to income and family size.
• Adjustments are made annually, based on their required recertification.
• If an income or family size has a significant change before the annual certification date, it is possible to submit the updated information to recalculate  payment  rates at any given time.

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REPAYE and ICR Plans

• Both allow any borrower with eligible federal student loans to apply.
• The ICR plan is the only available option for parent PLUS Loan borrowers.
• The payments stop being calculated based on income only if it rises above the point where the calculated monthly payment amount exceeds what the debtor would have to pay under the 10-year Standard Repayment Plan. In that case, they'll begin making payments under the 10-year Standard Repayment Plan. If their income lowers again, they’ll get back on paying based on their income.
• If the debtor doesn’t re-certify their income by the annual deadline on the REPAYE Plan, they’ll be placed on another plan where their payments won’t be based on their income. On the ICR, they’ll remain on the plan, but their payments won’t be based on income. Instead, they’ll have to pay a 10-year Standard Repayment Plan rate.
• Here is a list of the Federal Student Loans you can repay under these plans.

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PAYE and IBR Plans

• To qualify for these, the payment that would be required to to qualify must be lower than the amount the debtor would have to pay on a 10-year Standard Repayment Plan.
• To qualify for the PAYE Plan, they also need to be a new borrower.
• If their income increases over time, the monthly payment could be higher than what they would pay under a 10-year Standard Repayment Plan.
• If the debtor fails to re-certify on time, they’ll remain on the plan but will have to pay a 10-year Standard Repayment Plan fee instead of it being based on their income.
• Here is a list of the Federal Student Loans you can repay under these plans.

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Benefits of Enrollment

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There are many benefits to enrolling in an income-driven repayment plan. They are a great way of saving money, allow more flexibility, and can help you deal with the unexpected.

The best benefits of any income-driven repayment plans:

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1. Adjusted to your situation

Having student loan monthly payments calculated based on discretionary income means that you’ll be able to afford payments without the extra pressure that normal student loan rates put on financial situations.

This reduces the stress and anxiety triggered by not knowing if one can afford to survive.

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2. The remaining balance is forgiven

Any of the income-driven repayment plans forgives remaining balances loan holders may have after 20 to 25 years of paying  student loans.

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REPAYE Plan forgives student loans after 20 years if all loans under the plan were taken out for undergraduate studies, and 25 years if they are for graduate or professional studies.

IBR Plan forgives the borrowers’ remaining balance in 20 years if they are a new borrower on or after July 2014, and 25 years if not.

PAYE Plan forgives them in 20 years and ICR Plan in 25, regardless of the kind of debt they have or what kind of borrower they are.

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3. Your payments could be zero

Borrowers with low incomes can be eligible for a loan with $0 payments. 

For the IBR, PAYE, and REPAYE plans, if the borrower's adjusted gross income is less than 150% of the poverty line - 100% of the poverty line for the ICR - the monthly loan payment is $0, and still contributes to loan forgiveness.

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4. No impact on your Credit Score

Borrowers can rest assured that their credit scores will not be harmed by income-driven repayment plans. If borrowers make the required monthly loan payment, it will be reported to credit bureaus as current on their debts, even if their payment is zero.

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Income-driven repayment plans are more than just a great way to adjust your student loan monthly payments to a figure closer to what you can afford.

In a day and age where every penny counts, IDR plans are a great way to ensure financial stability in anyone’s repayment journey.