How Income-Driven Repayment Plans Work and What You Need to Do

What income-driven repayment means and why it matters

Income-driven repayment is a way to lower your monthly student loan payment based on what you actually earn right now, not on how much you borrowed. Instead of a standard payment that stays the same for ten years, your payment changes each year based on your income and family size. If your income is very low, your payment could be as little as $0 per month — and you still make progress toward forgiveness.

The federal government offers four different income-driven plans, each with slightly different rules about how much you pay and how long you repay. Most borrowers find that at least one of these plans makes their loans more manageable than the standard ten-year repayment option. The catch is that you have to tell your loan servicer which plan you want; it does not happen automatically.

Key Takeaways

• Income-driven repayment calculates your payment as a percentage of your discretionary income — usually 10 to 20 percent depending on which plan you choose.
• You must recertify your income and family size every year, or your payment will jump back to the standard amount.
• The four plans are PAYE, REPAYE, IBR, and ICR, and they differ in how much you pay, how long you repay, and who can use them.
• You contact your loan servicer directly to switch plans; there is no separate government office or website where you make this change.
• If you stay on an income-driven plan for 20 to 25 years (depending on the plan), any remaining balance is forgiven, though you may owe taxes on the forgiven amount.

The four income-driven plans and how they differ

PAYE (Pay As You Earn) caps your payment at 10 percent of your discretionary income and forgives the balance after 20 years. You must have taken out your first federal loan after October 1, 2007, and received a disbursement after October 1, 2011, to use this plan. This is often the best option for newer borrowers with lower incomes.

REPAYE (Revised Pay As You Earn) also caps your payment at 10 percent of discretionary income and forgives after 20 years if you only have undergraduate loans, or 25 years if you have any graduate loans. Unlike PAYE, there is no date restriction — anyone with federal loans can use REPAYE. However, REPAYE counts your spouse's income even if you file taxes separately, which can raise your payment.

IBR (Income-Based Repayment) is the oldest income-driven plan. It caps your payment at 10 or 15 percent of discretionary income depending on when you took out your first loan, and forgives after 20 or 25 years. Most newer borrowers are better off with PAYE or REPAYE, but IBR is still an option if the others do not fit your situation.

ICR (Income-Contingent Repayment) is the most restrictive plan. It calculates your payment differently — as 20 percent of discretionary income or what you would pay on a twelve-year fixed schedule, whichever is less — and forgives after 25 years. ICR is rarely the best choice, but it is the only income-driven plan available to borrowers with Parent PLUS loans.

How to contact your loan servicer and request a plan change

Your loan servicer is the company that collects your payments. You can find out who services your loans by logging into studentaid.gov with your FSA ID, or by calling the Federal Student Aid Information Center at 1-800-4-FED-AID (1-800-433-3243). The website will show you your servicer's name and phone number.

Once you know who your servicer is, contact them directly by phone or through their website to request an income-driven plan. You do not need to fill out a separate government form first. Your servicer will ask you which plan you want and will send you a form to fill out. On that form, you will report your income, family size, and state of residence. Use your most recent tax return or pay stubs as your source — the servicer will verify this information later if needed.

The servicer will calculate your new payment based on the information you provide and send you a notice showing your new monthly amount. This usually takes two to four weeks. Your payment will not change until the servicer confirms the plan switch, so keep making your current payment until you receive written confirmation of the new amount.

What "discretionary income" means and how it affects your payment

Discretionary income is not your total income. It is your adjusted gross income (from your tax return) minus 150 percent of the federal poverty line for your family size and state. The poverty line changes each year, so your discretionary income changes even if your salary stays the same.

For example, if you earn $35,000 per year and the poverty line for a single person in your state is $14,000, your discretionary income is $35,000 minus $21,000 (150 percent of $14,000), which equals $14,000. On PAYE or REPAYE, your payment would be 10 percent of $14,000, or $140 per month. If your income drops to $20,000, your discretionary income becomes negative, and your payment is $0.

This is why your payment can change significantly from year to year even if you stay on the same plan. Your servicer recalculates your discretionary income every year based on the income you report. If you do not recertify your income, your payment automatically goes back to the standard ten-year amount, which is usually much higher.

Recertifying your income every year

Once you are on an income-driven plan, you must tell your servicer your current income and family size every year. This is called recertification. Your servicer will send you a notice before your recertification is due — usually around the anniversary of when you switched to the plan. You can recertify by phone, mail, or through your servicer's website.

To recertify, you will need your current income information. You can use your most recent tax return, recent pay stubs, or a signed statement of your income if you are self-employed or between jobs. If you do not recertify by the deadline, your payment will jump to the standard amount for your loan balance, which can be hundreds of dollars more per month.

Some servicers offer an income-driven plan that recertifies automatically using IRS tax data, but this is not yet available for all borrowers or all servicers. Ask your servicer whether automatic recertification is an option for you.

What happens to unpaid interest and loan forgiveness

If your payment is very low or $0, interest still accrues on your loans every month. On PAYE and REPAYE, the government will pay any unpaid interest that builds up during your in-school period and your first three years of repayment. After that, unpaid interest is added to your loan balance — a process called capitalization. On IBR and ICR, interest capitalizes immediately if your payment does not cover the interest owed.

After you have been on an income-driven plan for 20 to 25 years (depending on which plan you chose), any remaining balance is forgiven. You will not owe that money anymore. However, the IRS may treat the forgiven amount as taxable income in the year it is forgiven, which could result in a tax bill. Some borrowers set aside money each year to cover this potential tax, while others wait to see whether they actually owe taxes when forgiveness happens.

Frequently Asked Questions

What if my income goes up — will my payment increase?

Yes. When you recertify each year, your servicer recalculates your payment based on your current income. If you earned more money, your payment will be higher. If you earned less, your payment will be lower. This is why income-driven plans work best for people whose income is stable or declining.

Can I switch between income-driven plans?

Yes. You can contact your servicer and request a different plan at any time. There is no penalty for switching. Some borrowers switch plans if their circumstances change — for example, if they get married or have a child, they might switch to a plan that handles spouse income differently.

What if I have both federal and private student loans?

Income-driven plans only work with federal loans. Private loans have their own repayment options, which you would need to discuss with your private lender. You can put your federal loans on an income-driven plan while keeping your private loans on whatever plan your lender offers.

Do I lose income-driven repayment if I change jobs or move?

No. Your plan stays in place as long as you recertify your income every year. Changing jobs or moving does not affect your plan, though your income may change, which will affect your payment amount at your next recertification.

What if I cannot afford even the income-driven payment?

Contact your servicer and ask about deferment or forbearance, which temporarily pause your payments. You can also recertify with a lower income if your circumstances have changed. If you are struggling, your servicer can discuss all your options, including whether staying on an income-driven plan is still the best choice for you.