The Truth About Income-Driven Repayment Plans

Income-driven repayment plans are not your friend.

Although these plans get promoted as a super-package that boosts your budget today and forgives your student loans tomorrow, they can actually keep you in debt years longer than necessary. And forgiveness through income-driven repayment plans can take decades (if it happens at all)!

Let’s dig into the different kinds of income-driven repayment plans, how they work, and if they’re worth applying for. Plus, we’ll show you the best way to get rid of your student loans for good.

 

What Are Income-Driven Repayment Plans?

Income-driven repayment (IDR) plans cover four kinds of plans offered by the Department of Education to help student loan borrowers manage their payments. 

Just so you know, this program is only available for federal student loans. Also, defaulted loans aren’t eligible for any IDR plans—but you can use student loan rehabilitation or consolidation to get back on track.¹

Even though the four types of IDR plans have a few differences (which we’ll walk you through in a minute), they all have three main things in common:

• Lower payments. Instead of making monthly payments based on the amount of your debt, IDR payments are determined by your income—usually 10% to 15% of your discretionary income (which is basically the difference between your annual income and the poverty guideline for the same family size). But it also depends on the date you took out the loan and other factors.  
• Longer terms. Instead of working the standard 10-year payoff plan, IDR plans typically run for 20 or 25 years. The longer term makes sense mathematically: Smaller payments and growing interest add up to long-lasting debt. But it makes zero sense if your goal is to get out of debt and build wealth. 
• Promise of forgiveness. For all the IDR plans, there’s also the “promise” to forgive any remaining loan balance at the end of the 20- or 25-year term—but this rarely works out and has a lot of conditions around it, as you’ll see.

The reasoning behind IDR plans is simple but flawed: Borrowers with really big balances compared to their income probably need help managing their student loan payments. And yeah, it can be a real struggle to make progress. But keep in mind that both your debt size and income can—and should—change over time.

As your income increases, your debt should steadily disappear. IDR plans tend to do the opposite. They lock people into a pattern of low income and zero progress on debt—and in most cases, your debt grows! That combo will only slow down your dreams of financial peace.

Types of Income-Driven Repayment Plans

Just so we’re clear: We do not recommend these plans as your best strategy to eliminate debt. We actually teach everyone to get as big a shovel—aka paycheck—as possible and use the debt snowball method as the quickest and most powerful way to ditch your student loans and become debt-free. But it’s worth knowing how IDR plans work—and why you should avoid them.

Ready to get rid of your student loans once and for all? Get our guide.

The four types of IDR plans are:

• Income-Based Repayment (IBR)
• Pay As You Earn (PAYE)
• Saving on a Valuable Education (SAVE)—previously, Revised Pay As You Earn (REPAYE)
• Income-Contingent Repayment (ICR)

Income-Based Repayment (IBR)

A lot of people confuse income-driven repayment (IDR) with Income-Based Repayment (IBR). Remember that IDR is the general term for these plans, while IBR is a specific type of plan.

So, what’s IBR all about? An IBR plan sets up your monthly student loan payments based on two factors: the date when you became a new borrower and your discretionary income. Here’s how payments for the two groups of borrowers are calculated:

• If you were a new borrower on or after July 1, 2014, you’ll generally pay 10% of your discretionary income monthly—but if that works out to be more than you would pay under the 10-year standard repayment plan amount, you wouldn’t qualify for IBR.

• Or if you were a new borrower before July 1, 2014, you’ll be looking at a monthly payment of 15% of your discretionary income. But again, that only applies if the amount actually lowers your payment in comparison with the standard repayment amount.²

The repayment period for a loan placed in IBR also depends on the date the loan originated:

• If you were a new borrower on or after July 1, 2014, it’s a 20-year term.
• And if you got into this mess before July 1, 2014? It’s a 25-year term. Yikes!³

Pay As You Earn (PAYE)

On the PAYE plan, monthly payments are going to be 10% of your discretionary income.⁴ And similar to IBR, you can only set this plan up if the monthly payment would actually be lower than a standard payment.

One more wrinkle with PAYE is that you must meet the Department of Education’s “new borrower” requirement, defined as follows:

• “You must have had no outstanding balance on a Direct Loan or FFEL [Federal Family Education Loan] Program loan on or after October 1, 2007,” and
• "You must have received a disbursement of a Direct Loan on or after October 1, 2011.”⁵

Saving on a Valuable Education (SAVE) Plan—Previously, Revised Pay As You Earn (REPAYE)

On June 30, 2023, President Joe Biden announced a new IDR plan called the Saving on a Valuable Education (SAVE) plan—which will replace the current REPAYE plan.⁶ If you’re already enrolled in the REPAYE plan, you’ll automatically be put in the SAVE plan.

What exactly is the SAVE plan? Just like the other IDR plans, your monthly payment is based on your income and family size. But here are the changes you can expect with the SAVE plan:⁷

• The income exemption increased from 150% to 225% of the poverty line. This means you may have a much lower monthly payment than you did on the REPAYE plan—or you may not have a monthly payment at all (for example, if you’re single and earn $32,800 or less a year).
• You won’t be charged for unpaid monthly interest. Your student loan balance won’t grow as long as you make your monthly payments.
• You no longer need to include your spouse’s income on your IDR plan application. If you’re married and you and your spouse file your taxes separately, you won’t need to include your spouse’s income for this plan—which could lower your payment.

And starting in the summer of 2024, these features of the SAVE plan will be added:

• If your income is above 225% of the poverty line and you have undergraduate loans, your payments will be reduced from 10% to 5% of your income. And if you have both undergrad and graduate loans, you’ll pay a weighted average of between 5–10% of your income.
• If your original loan principal was $12,000 or less, your remaining balance will be forgiven after you make payments for 10 years (with one year added for every $1,000 borrowed). The maximum timeframe for repayment is 20 years for undergrad loans and 25 years for graduate loans (as it was under the previous REPAYE plan).
• If you consolidate your loans, you won’t lose your progress toward forgiveness.
• You’ll still receive credit toward forgiveness for certain cases of deferment and forbearance (thought it’s not clear yet what those cases are).
• You’ll have the option to make additional payments to “catch up” for forgiveness credit.
• If you’re 75 days late on your student loan payment, you’ll be automatically enrolled in an IDR plan (as long as you gave the Department of Education access to your tax info).

So basically, all this adds up to a lower monthly student loan payment, which sounds nice—but it’ll only drag out your debt for longer. Remember, smaller payments mean smaller progress on your student loans.

While the SAVE plan seems like it’s doing you a favor, it’s really not. You’ll still have student loan debt hanging over you. And a lot can happen in 10, 20 or 25 years. You don’t want to wait around that long for forgiveness that may never happen. (If you were waiting on Biden’s plan to wipe out your loans during the pause, you know just how disappointing that can be.)

Income-Contingent Repayment (ICR)

This is the only form of IDR available for Parent PLUS Loan borrowers. But keep in mind that if you’re the parent in this scenario and your child is the student, you’re not eligible for any kind of IDR—at least not with a normal Parent PLUS Loan.

The only way to use an Income-Contingent Repayment (ICR) plan for your repayment is by first consolidating your Parent PLUS Loan into a Direct Consolidation Loan—either with just one Parent PLUS Loan or with any other federal student loans you have as the parent.

The monthly payment amount for an ICR plan is calculated differently than for any other kind of IDR. It will be whichever amount is lower:

• “20% of your discretionary income,” or
• “What you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income.”⁸

You can also look forward to a silver anniversary on this plan because the term of repayment is 25 years.⁹

Income-Driven Student Loan Cancellation

If you’ve come this far, you’re probably wondering how the student loan forgiveness or cancellation works for IDR plans. For all four types of IDR, if you have any remaining balance at the end of the term, it will be forgiven. Sounds great! Except for a few problems.

As we’ve seen, all of these plans are built around staying in debt for at least 20 years, and some plans run as long as 25 years! Can you imagine having student loan debt well into your 50s? Or if you’re a parent, that could mean a future that includes paying off student loans as a senior citizen!

That length of time should already be a red flag that this is a very expensive form of forgiveness! It’s like getting your hopes up that if you’ll just agree to live in a shack for a couple of decades, there will be a modest brick ranch waiting for you as a reward on the other side.

But actually, it’s worse than that. Why?

Because even if you make steady payments on the loans for years, there are all kinds of rules and potential legal changes you must keep up with to preserve your eligibility for the “forgiveness.” Let’s see what they are:

• In most cases, you have to make sure your income always stays low enough that you qualify for the IDR plan—which means it can’t go above the level where your payment would be higher than 10% of your monthly discretionary income. So, a promotion at work would probably put the kibosh on a loan cancellation. Your goal is literally to keep your income low in the hopes of getting some unknown future amount of the debt forgiven. That’s pretty dumb.  
• Missing recertification automatically kicks you out of some programs and into another plan that won’t be based on your income. In fact, it will speed your debt deadline way up—even if you’ve jumped through all the hoops for years. The Department of Education will now treat your loan as if it’s on a new 10-year repayment plan, or it will require full repayment by the original term of your REPAYE, whichever falls sooner. Look at it like a balloon lease on your student loan—it could explode at any time.  
• And in the other three IDR plans, missing recertification even once also disqualifies you from making income-based payments. You’ll stay on the same schedule, but now you’ll owe standard monthly payments as determined by your original loan amount. At least the payment hike is only temporary—if you recertify later, you can be reinstated into PAYE, IBR or ICR even after missing a deadline.  
• Here’s one more gotcha with missing the certification deadline even once on IBR or PAYE: Any unpaid interest will now be added to the principal of your loans, which will be subject to compound growth as well.¹⁰

All of these potential pitfalls start to make it look as if IDRs and their promise of forgiveness someday are really just a ticket to decades of debt.

In April 2022, the Biden administration announced a one-time payment adjustment to allow payments to count toward IDR plans that didn’t count previously.¹¹ And because of these changes, 804,000 borrowers have had their student loans automatically forgiven as of July 2023 (which totals to about $39 billion).¹²

Here’s the thing, though—those 804,000 borrowers have been paying on their student loans for at least 20 years. Yeah, they may have had a smaller monthly payment, but they’ve also paid thousands more than someone who paid off their loans in half that time. And they were originally told they wouldn’t have their loans forgiven because they missed one payment.

Bottom line: Forgiveness through income-driven repayment is not guaranteed.

The True Cost of Income-Driven Repayment Plans

On March 11, 2021, President Joe Biden signed into law a $1.9 trillion stimulus package that included a change to the standing student loan law.¹³ Prior to the new legislation, anyone who managed to stay qualified for their full 20 or 25 years of scheduled payments in an IDR—remember, not many people have done so—would also be subject to hefty taxes at the time of forgiveness.

Talk about forgiveness with strings attached.

Now, don’t misunderstand—we love the fact that the new law would suspend this tax for those rare ones who cross the forgiveness finish line. But the key word here is suspend. For now, student loan forgiveness is exempt from federal tax. But the relief measure is only temporary. It’s currently set to expire on January 1, 2026.¹⁴ And as political winds blow, this miraculous tax break could vanish overnight.

We don’t know about you, but a brief window of time when forgiveness isn’t taxed isn’t nearly enough reason for us to sign up for an IDR. Tax laws come and go, but there’s no substitute for focused intensity and the power of taking control of your money—regardless of what’s happening in Washington.

Applying for Income-Driven Repayment Plans

Still not convinced IDRs are bad news? Okay, we’ll give you the lowdown on how to apply. But don’t say we didn’t warn you about these scams.

The Department of Education has an application and approval process for any IDR. If you have federal student loans—remember private loans don’t qualify—you can request an IDR either through your lender or at studentaid.gov.

As we’ve mentioned several times, getting an IDR is all about certifying your income to prove it’s low enough to qualify for the “benefit.” And the obligation to recertify continues every year until you pay the loan off or get it forgiven after 20 or 25 years. (Surely the debt snowball method is calling your name by now?)

Is an Income-Driven Repayment Plan Right for You?

How about no? Seriously. You’re smarter than an IDR plan. Even if it feels like it’s the only way you can make your student loan payment.

Instead of speeding up your debt payoff, these plans slow it way down. Instead of inspiring you to find new forms of income, they encourage you to keep your income low. And among the millions of people who have endured 20 or more years inside an IDR, only a small percentage have ever been forgiven by the Department of Education!

Alternatives to Income-Driven Repayment Plans

So, what do you do if you’re struggling to make your student loan payments? Instead of putting yourself in an IDR box for years, here are some ways to not only stay on top of your student loan payments but also make progress faster—and save yourself a ton of time and stress.

Get on a Budget

Here’s the deal: It’s hard to keep up with your student loan payments when you have no clue where your money’s going. But a budget gives you control and confidence. By making a plan for your money every month, you can make sure you have enough to cover the basics and your debt payments. And when you track your spending, you’ll find ways to save more money. Seriously, a budget is life-changing, and you can start budgeting right now for free with EveryDollar!

Increase Your Income

If you’re looking into IDRs, chances are, your income is a big part of what’s holding you back. But you don’t want to be locked into a low-paying job for the next 20 years, do you? Nope! Your best bet is to increase your income—so you have more money to throw at your student loans and more money to put toward your other goals (like buying a house, going on vacation, or snagging that sweet grill you’ve been eyeing).

And it doesn’t have to be complicated. Look for side hustles, sell stuff, ask for a raise. Or maybe you need to switch jobs altogether. Whatever you do, don’t settle for a low income just to qualify for an IDR plan. You’re too good for that! You deserve the chance to make more money and build wealth for your future.

Use the Debt Snowball

Forget IDR plans. You want a plan that really works. One that will help you pay off your student loans (and any other debt you have) faster than you ever thought possible. The debt snowball is your game plan for tackling debt and getting your life back. Here’s how it works:

• First, list all your debts from the smallest balance to largest balance. If you’ve got more than just student loans (aka credit card debt, car loans, personal loans), include those too! Ignore the interest rates for now—we know that seems weird, but just trust us on this.
• Throw any extra money you can find toward paying off your smallest debt while still paying the minimum payments on your other debts. You have to attack that first debt with everything you’ve got!
• Once you’ve paid off your smallest debt, move to the second-smallest debt. Take everything you were putting toward the first one and add it to the minimum payment of the second one. The more you pay off, the more your freed-up money grows and gets thrown onto the next debt—like a snowball rolling downhill.
• Repeat this process until you’re finally out of debt. Boom. See, that’s much more proactive and reliable than IDR.

You don’t have to carry around student loan debt for the next 20 years. You can pay off your student loans, even if it feels impossible right now. Millions of people have taken control of their money and become debt-free. And now it’s your turn!