Income-Based Student Loan Repayment Plans

Income-based student loan repayment plans are a type of payment plan where monthly payments are based on the borrower’s monthly income, allowing for borrowers with lower incomes to make lower monthly payments. Each year, the borrower submits income and family size information from the previous year to recalibrate the monthly payment amounts. For many borrowers with low to moderate income and moderate to high student loan debt, income-driven repayment plans can significantly reduce the monthly financial burden of student loan payments.

While some private lenders may offer income-based repayment plans at their discretion, the main place where you are sure to find them available is on federal student loans. The federal government offers four different plans that fall under the broad umbrella of income-driven repayment plans. Eligibility requirements and calculations of payments vary from one plan to another. The four plans are income-based repayment, Pay As You Earn, income-contingent repayment, and income-sensitive repayment. Borrowers under any of these repayment plans may be eligible for Public Service Loan Forgiveness, which discharges any remaining loan balance after making 120 loan payments while working in a qualified full-time public service job.

Income-Based Repayment

Any federal student loan except a parent PLUS loan, or a consolidation loan that included a parent PLUS loan, can be repaid under the income-based repayment program. If you have a Perkins loan, it must be consolidated into a Direct Loan to qualify.

There are two payment structures, depending on whether you had any federal student loans before July 1, 2014. For loans older than July 1, 2014, your monthly payments will be 15 percent of discretionary income. In this case, your discretionary income is your gross monthly income minus 150 percent of the poverty guideline for your family size for your state of residence. Any remaining balance on your loans is eligible for loan forgiveness after 25 years of payments. If your only loans were issued on or after July 1, 2014, your monthly payments are 10 percent of your discretionary income, and you are eligible for loan forgiveness after 20 years of payments.

Pay As You Earn

To be eligible for the Pay As You Earn payment plan, borrowers must not have had any federal student loans with an outstanding balance as of October 1, 2007, and also must have taken out at least one Direct Loan since October 1, 2011. Also, all loans being repaid under this plan must be Direct Loans, which can include consolidated loans of other types, except consolidated parent PLUS loans.

This plan is identical to the new income-based repayment plan for borrowers who take out their first loan on or after July 1, 2014. It was created in 2012 to make the payment structure available before the new guidelines for the income-based repayment plan were issued.

Income-Contingent Repayment

Borrowers are eligible for income-contingent repayment on any loan within the federal Direct Loan program. Notably, income-contingent repayment is the only income-driven repayment plan available for parent PLUS loans, which must be consolidated under the Direct Loan program to qualify.

Monthly payment amounts under this plan are 20 percent of discretionary income, calculated as gross monthly income minus the poverty guideline for the borrower’s family size for their state of residence. These payments will be higher than they would be on other income-driven repayment plans available. Therefore, borrowers who have other options should use those instead.

Income-Sensitive Repayment

This is an older repayment plan, and it is only available to borrowers who have loans made under the Federal Family Education Loan program, which ended in 2010. Federal Stafford loans, PLUS loans, and consolidation loans made under this program qualify.

Monthly payments under this plan can be between 4 percent and 25 percent of monthly income, but they must cover at least the accrued interest. Borrowers can only use income-sensitive repayment for a total of five years, and after that, must switch to another repayment plan.