Feeling overwhelmed by your federal student loan repayment each month? If you’re paying a high amount on student loans compared to your income, an income-driven repayment (IDR) plan might be beneficial
As offered by the federal government, an IDR plan aims to set your monthly student loan payment at an affordable amount based upon your lifestyle. In the following, we’re going to dive into the details of an IDR plan, how an IDR plan may benefit you, and why educating yourself on IDR can lead to making better financial decisions.
What is Income-Driven Repayment?
The federal government offers the IDR plan to eligible individuals with federal student loan debt. This payment plan sets monthly payments based on your income and family size. This tactic increases affordability and decreases stress for those struggling to make payments on their student loans.
Currently, there are four different types of IDR plans:
- Revised Pay As You Earn (REPAYE): With REPAYE, you pay 10% of your discretionary income towards your federal student loan debt. Repayment term is 20-25 years, depending on your course of study.
- Pay As You Earn (PAYE): With PAYE, you pay 10% of your discretionary income towards your federal student loan debt. Although, the amount is capped at your initial 10-year Standard Repayment amount. The repayment term is 25 years.
- Income-Based (IBR): With IBR, you pay between 10% and 15% of your discretionary income. This may vary based on whether you borrowed before or after July 1, 2014. The repayment term is 20-25 years, depending on when you borrowed.
- Income-Contingent (ICR): With ICR, you either pay 20% of your discretionary income or you would pay on an income-based payment plan fixed over 12 years. The repayment term is 25 years.
How Do I Know if I’m Eligible?
Qualifying for an income-driven repayment plan is relatively simple. With an eligible federal student loan, not in default, you may be eligible for a repayment plan. The plan you qualify for can vary based on the type of loan and loan amount.
Some examples of federal student loan types that are accepted for IDR plans include, Direct:
- Subsidized Loans
- Unsubsidized Loans
- PLUS Loans (when made directly to students)
- Consolidation Loans (when made directly to students)
To apply for an income-driven repayment plan, you’ll need to submit an application online and provide proof of income.
How Can IDR Benefit Me?
If you’re having trouble making your student loan payments or if your payments eat up a large chunk of your monthly income, enrolling in an IDR plan could be in your benefit.
Income-based repayment plans are designed to lower your monthly student loan payments so you can more comfortably afford the things you need. Moreover, your credit score is not negatively impacted when you’re enrolled in an IDR plan. In fact, many people in an IDR plan find it easier to make their student loan payments on time, so being in one could actually help your credit.
IDR plans are also a viable option for those who may be unemployed or unable to make payments on their loans. Specifically, this can be extremely helpful in cases where eligibility for deferment and/or forbearance has already been exhausted.
The Bottom Line on Income-Driven Repayment
Enrolling in an income-driven repayment plan can be a smart move for those looking to lower their monthly federal student loan payments. In addition, with several IDR plans to choose from, you can find the one that best suits your needs.
Meanwhile, staying on top of your own financial literacy can go a long way in paying off your student loans and making the most informed financial decisions. Keep an eye on the LendKey blog for the latest on borrowing, financial planning and more!