Income-Driven Repayment

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By Mark Kantrowitz

March 15, 2021

Income-driven repayment plans base student loan payments on a percentage of the borrower’s discretionary income, as opposed to the amount owed. Generally, if a borrower’s total student loan debt at graduation exceeds their annual income, they will have a lower loan payment under an income-driven repayment plan. 

Discretionary income is the amount by which adjusted gross income (AGI) exceeds a specific multiple of the poverty line (P.L.).

Types of Income-Driven Repayment Plans:

  • Income-Contingent Repayment (ICR). ICR became available on October 1, 1993, with the start of the Direct Loan program. Loan payments do not include a standard repayment cap.

  • Income-Based Repayment (IBR). IBR became available on July 1, 2009. IBR is the only income-driven repayment plan that is available to borrowers in both the Federal Family Education Loan Program (FFELP) and the Direct Loan Program.

  • Pay-As-You-Earn Repayment (PAYE). Congress passed PAYE as a change to the IBR program, reducing the percentage of discretionary income and the repayment term, effective for new borrowers as of July 1, 2014. President Obama used his regulatory authority for ICR to make PAYE available earlier, as of December 21, 2012, for new borrowers as of October 1, 2007, who have at least one loan disbursed on or after October 1, 2011.  

  • Revised Pay-As-You-Earn Repayment (REPAYE). After complaints about eligibility restrictions in the PAYE repayment plan, President Obama again used his regulatory authority for ICR to make a revised version available to all borrowers. REPAYE became available on December 17, 2015. REPAYE has a marriage penalty and excludes a standard repayment cap.

ICR and REPAYE do not have a standard repayment cap, unlike IBR and PAYE. Only REPAYE has a marriage penalty.

Additionally, ICR, PAYE and REPAYE are available only to borrowers in the Direct Loan program. IBR is available to borrowers in both the Federal Family Education Loan Program (FFELP) and the Direct Loan Program.

There is another repayment plan based on income, Income-Sensitive Repayment (ISR), which is available only in the FFEL program. However, it involves a mutual agreement between borrower and servicer/lender to set the monthly payment to a specified percentage (4% to 25%) of gross income for a specified period of time.

Key Differences Among Plans

The main differences among the income-driven repayment plans are illustrated by this table.

 

Repayment Plan Percent of Discretionary Income Definition of Discretionary Income Repayment Term
(Undergraduate)
Repayment Term
(Graduate)
ICR 20% 

 AGI – 100% PL

300 payments
(25 years)

300 payments
(25 years)

IBR 15% AGI – 150% PL 300 payments
(25 years)

300 payments
(25 years)

PAYE 10%

AGI – 150% PL

240 payments
(20 years)

240 payments
(20 years)

REPAYE 10%

AGI – 150% PL

240 payments
(20 years)
300 payments
(25 years)

 

Under the American Rescue Plan Act of 2021, loan forgiveness after 20 or 25 years of payments in an income-driven repayment plan is tax-free through 2025.

Another program, Public Service Loan Forgiveness (PSLF), cuts the number of payments to 120 (10 years). The loan forgiveness under PSLF is permanently tax-free.

There are other minor differences among the income-driven repayment plans, such as whether the federal government pays accrued but unpaid interest during the first three years, how accrued but unpaid interest is capitalized and minimum required payments when the calculated payment is less than $10.

Income-Driven Repayment Calculators

Income-driven repayment calculators can provide a personalized evaluation of the impact of the differences of each income-driven repayment plan on the monthly loan payment and total payments.

A good place to start:

See the best 529 plans, personalized for you

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