Income-Driven Plans

For federal loans, there are several ways to pay off loans other than using a standard plan. There are several income driven repayment plans that can provide relief to those experiencing difficulty paying off their loans. REPAYE and PAYE are the most popular for direct loans, but IBR and ICR could be valuable if you have PLUS loans made to parents. Each option has its advantages and disadvantages, but all offer several things.

Income driven repayment plans tie loan payments to income. This makes it easier for those who are struggling to repay their loans under a standard plan by offering flexibility tied to their income. They can range from 10% to 20% of discretionary income and loans may be forgiven in 10-25 years depending on different factors. Loan forgiveness has some drawbacks, however. The main drawback is that under current tax code, loan forgiveness is taxed as income. This could lead to a significant tax bill when loans are forgiven. Additionally, interest can accrue if payments are low, so your total college indebtedness could expand while you are making payments. Finally, income has to be recertified every year so that the monthly payment amounts can be determined.

Revised Pay As You Earn (REPAYE Plan)

REPAYE is one of the most popular income based repayment plans. It is an extension of PAYE to include more student loan borrowers. Monthly payments of your federal student loans are capped at 10% of your discretionary income. To calculate discretionary income you take your income and subtract 150% of the poverty line ($18,090 for a single household in 2017). Ten percent of your discretionary income must go to payments in REPAYE. After 20 years of payments for undergraduate borrowers, the remaining debt is forgiven. After 25 years of payments for those with at least some graduate loans, the remaining debt is forgiven.

It is important to note that spousal income is included in this calculation. If you are married or plan to get married, this could significantly increase your monthly payments since there are no caps on the amount you pay until the balance is paid off or the loans are forgiven. Almost all federal loans are eligible for REPAYE, except PLUS and FFEL loans made to parents. Most FFEL loans are eligible if they are consolidated. REPAYE must be renewed every year. Sometimes, the payment made through REPAYE is not enough to cover the interest on the loan. Interest can begin to accrue if the payment is not enough.

This means loan balances can grow instead of decline until the debt is forgiven after 20 years. The Department of Education tries to help out these borrowers who have very high debt and little income. If your payment under REPAYE causes interest to accrue, the Department of Education will pay the interest for the first 3 years on subsidized loans. The Department of Education will also pay 50% of accrued interest on unsubsidized loans for the life of REPAYE and 50% of capitalized interest on subsidized loans after the initial 3 years of 100% coverage.

Interest can also capitalize (be added to the balance and thus beginning to compound). This can occur if you forget to recertify your income, or if you leave REPAYE. There is no cap on the amount of interest that can be capitalized under REPAYE unlike PAYE.

Pay As You Earn (PAYE Plan)

PAYE was created before REPAYE and is very similar. PAYE also caps your payments at 10% of discretionary income, but you cannot pay more than what you would pay under a 10-year standard plan. Like REPAYE, spousal income is also included in the calculation of discretionary income unless you file separately. PAYE is for those who have a partial financial hardship (PFH), and have been a new borrower as of 10/1/07. In addition to being a new borrower as of 10/1/07, you must have also had a direct loan disbursement after 10/1/11. This repayment program is geared towards those who have high debt and low income.

PAYE forgives your loans after 20 years, and direct loans other than PLUS loans made to parents of students are eligible. Direct consolidation loans without PLUS loans made to parents are also eligible. FFEL loans are eligible if consolidated and do not have any PLUS loans made to parents. PAYE has been largely replaced by REPAYE because REPAYE does not have financial hardship requirements, however, PAYE does have a cap on the payment amount while REPAYE does not. If one is expecting a large pay increase in the future, REPAYE may end up costing more than PAYE.

PAYE also does not have all of the generous interest subsidies that REPAYE has. The Department of Education only pays interest on subsidized loans for three years if interest is accruing. Unlike REPAYE, spousal income does not have to be reported under PAYE if you and your spouse are filing separately. If you plan on marrying someone with a high income, this should be taken into account.

Interest capitalization is different under PAYE. Accrued interest is capitalized (added to the balance) if you no longer have a partial financial hardship or you leave PAYE. However, there is a benefit to PAYE’s capitalization over REPAYE. Under PAYE, only 10% of the loan balance can be capitalized as opposed to the unlimited amount that can be capitalized under REPAYE.

Income-Based Repayment (IBR Plan)

If you are a new borrower before July 1, 2014, IBR is set at 15% of discretionary income and forgiveness is after 25 years. If you are a new borrower after July 1, 2014, IBR is set at 10% of discretionary income and forgiveness is after 20 years. IBR and REPAYE are similar for new borrowers. All Direct loans except PLUS loans made to parents and direct consolidation loans with PLUS loans made to parents are eligible. Additionally, all FFEL loans except PLUS loans made to parents and FFEL consolidation loans with PLUS loans made to parents are eligible. You must also have a partial financial hardship to be eligible for the IBR plan, and you must recertify for income every year to stay in the plan.

Your payment cannot exceed what you would pay under the standard repayment plan, similar to PAYE. Also, spousal income is not included in calculations if you and your spouse file separately. IBR additionally has the same interest subsidy for subsidized loans as PAYE where the Department of Education pays accrued interest on subsidized loans for three years.

A difference between PAYE and IBR is that there is no limit on interest capitalization. Accrued interest can capitalize if you leave the plan or you are no longer qualified for the plan. Additionally, if you leave IBR you may have to begin the standard plan before you could try to switch to another plan.

Income-Contingent Repayment (ICR Plan)

ICR is the only plan that PLUS loans made to parents are eligible for, but they have to be repaid by a consolidation loan after July 1, 2016. All other FFEL and Direct loans are eligible for ICR. ICR offers loan forgiveness after 25 years of qualified payments. Unlike PAYE and IBR, there are no income requirements to sign up for ICR, but like all income-driven repayment plans you must recertify income every year. The monthly payment in ICR can be up to 20% of discretionary income or what you would pay on a fixed plan with a 12 year term, whichever is less. Your spouse’s income is only considered in this plan if you filed jointly.

Unfortunately, there is no subsidy for accrued interest like REPAYE if your payment does not cover accruing interest. Additionally, interest is capitalized annually, but there is a maximum of 10% of the original ICR balance that can be capitalized. Finally, if you leave this plan you are eligible to enter other loan forgiveness plans. Overall, this is the least desirable income-driven plan, but may be the only options for PLUS loans that were taken out by parents who are struggling to make repayments.

Public Service Loan Forgiveness (PSLF Plan)

PSLF is an excellent way for quicker loan forgiveness than other income-driven repayment plans. Additionally, loan forgiveness is tax exempt, unlike the other repayment plans. Direct loans are eligible, and Perkins and FFEL loans are eligible if consolidated. Only 120 qualified payments or 10 years of qualified payments can result in forgiveness of loans. This is only available for people working for government organizations of all levels and both taxable and tax-exempt non-profits. Payments are 10% of discretionary income if you use REPAYE as your income-driven plan.

PSLF must be used with one of the other income-driven plans, and you must be working full time (30+ hours) a week. PSLF has been under attack by the Trump Administration, however, because people with very expensive graduate degrees have been costing the federal government a lot of money in loan forgiveness. It’s future is uncertain, but would be an excellent way for those with extremely high levels of debt with an interest in typically lower paying public service jobs to affordably repay their federal loans. An example is a lawyer with significant law school debt who would like to be a public defender. She could use PSLF to eliminate her student loans quicker while at the same time pursuing a noble career path.