Income-Driven Repayment (IDR) Plan Guide

Overview

An income-driven repayment (IDR) plan could help you cut your monthly payments, tying the amount you have to pay to the amount you earn, which can help you handle your debt your way. Let’s go over some of the details to see if income-based repayment could work for you.

What is an income-driven repayment plan?
An income-driven repayment (IDR) plan is a repayment plan for people with federal loans designed to make your monthly loan payments more affordable. Income-driven repayment plans don’t cover private loans.

Income-driven plans base your monthly payments on how much money you make. But if you’re still figuring out the whole “career” thing, don’t worry; you can still qualify for income-driven repayment. If you don’t have a job, or if your income is low enough, you can bring your payment down to $0. Really.

There are 4 types of income-driven plans:

  • Revised Pay as You Earn (REPAYE)
  • Pay as you Earn (PAYE)
  • Income Based Repayment (IBR)
  • Income Contingent Repayment (ICR)

Is it right for me?
If you have federal loans and you want to lower your monthly payments (or if you’re having trouble making your monthly payments), income-driven plans are usually a good option. These plans are a great way to make sure that you don’t miss a payment on your federal loans. If you do not have a job right now, income-driven plans are a good option for you because your monthly payment would be $0. You can also always change plans as your life changes so you’re not locked into a plan that doesn’t work for you.

Okay, what’s the catch?
If you enroll in an income-driven repayment plan, you could end up paying more over the life of your loan than you would normally. That’s a small price to pay, though, if it means that you can make all your payments on time. Missing a loan payment can really hurt your credit score, keeping you from reaching goals like renting an apartment or getting a new car. Enrolling in an IDR plan will let you stay up to date with making your payments and help you build your credit score.

 

Advantages

Now that you know what income-driven repayment plans are, we’ll cover some of the ways these plans can help you out when it comes to paying down your debt.

Your monthly payment could be lower
Income-driven plans could help you bring down your monthly payments. Don’t make a lot of money? Out of work? Your payment could even be as low as $0 if you can’t afford to make payments.

Your monthly payments change with your income
With an income-driven repayment plan, your monthly payment changes along with how much money you earn, so you never pay more than you can afford. Your payment is based on 10-20% of your discretionary income, depending on the plan that you’re enrolled in. If you don’t earn any income, your monthly payment would be $0.

What is your discretionary income? The U.S. Department of Education considers your discretionary income to be your gross, after tax income minus the poverty guidelines for your family size. Summer’s free tool can help you estimate how much you would be paying under an income-driven repayment plan based on your discretionary income.

Your loans can be forgiven
If you’ve still got a loan balance after 20 or 25 years of qualifying repayment (depending on the plan), the remaining balance could be forgiven as part of an income-driven repayment plan. That means you won’t have to pay it back.

You can get interest benefits
If your monthly payment doesn’t cover the full amount of interest added to your loans that month, most income-driven repayment plans also offer what’s called an “interest benefit.” That means that, depending on which plan you’re enrolled in, you could be off the hook for paying off all of the interest on your loans for a certain period.

 

Disadvantages

You know the basics and the benefits of going with an income-driven repayment plan, but what are the drawbacks of these plans? Time to look at the downsides so you can make the best decision for you (with our help, of course).

You’ll pay more overall in interest
If you enroll in an income-driven plan and cut your monthly payments, you may pay more interest over a longer period of time than you would with a standard 10-year repayment plan. But paying more overall may be worth it to you if it means lowering your monthly payment now so you can make payments on time.

You’ll pay for a longer period of time
Income-driven plans extend the term of your loan to between 20 and 25 years, which is twice as long as the standard 10-year plan. But during that time, you’ll pay less each month, helping you manage your loans in a way that works better for you.

The amount forgiven may be taxed
At the end of the 20-25 years of income-driven repayment, if you’ve still got a loan balance and it’s forgiven (which would be great, right?), you may still need to pay income tax on the amount that’s forgiven (less great).

 

Eligibility

With the pros and cons of income-driven repayment covered, let’s go over what it takes to be eligible for these programs.

Different plans have different eligibility
Which income-driven plans you’re eligible for depends on two things: your income levels compared to your debt and the type of federal loans you have.

Income compared to debt
You don’t have to earn a certain amount of money each year to be eligible for any of the four income-driven repayment plans. Your servicer will determine whether you’re eligible: for PAYE and IBR, they’ll compare the amount you earn to the amount of your loan. You’ll likely be eligible if your monthly payments on a PAYE or IBR plan would be less than what they’d be under a standard 10-year plan. If you’d like to estimate your repayment amount right now, you can use Summer’s free payment estimator tool.

Type of loans
Only certain types of loans are eligible for each of the four income-driven repayment plans. Check out the chart below to find out which loans are eligible for each of the four plan types. One other thing: keep in mind that to be eligible, your loans can’t be in default.

Which of my loans are eligible?


Who is eligible as a borrower?

Payment Amount

With income-driven repayment plans, your monthly payments are tied to how much money you earn, but how much will you actually be paying and how is that number calculated? Let’s go through it.

Your monthly payment changes with your income
Your monthly payment will be based on 10-20% of your discretionary income, depending on which plan that you’re enrolled in. If you’re not making any money, your monthly payment would be $0. Seriously.

What is discretionary income?
Your discretionary income, as calculated by the U.S. Department of Education, is your gross, after tax income minus the poverty guidelines for your family size. No worries about remembering this now; we’ll help you figure this out when it’s time for you to enroll.

How can I calculate my monthly payment?
Check out the chart below to figure out how much you’d be paying under each income-driven repayment plan. If you’d like to estimate how much you’d be paying, you can use Summer’s free tools for borrowers.

What’s the most I could be paying?

Apply

When to apply
If you left school recently, you can’t apply until 4 months after that. Otherwise, you can apply any time. One thing to remember, though: it can take your servicer up to 2 months to process your application.

How to apply
You can submit an application by using our online tool. We’ll walk you through the steps, help you determine the cost of the plans you’re eligible for, and get you enrolled.

Proving how much you earn
You’ll need to submit proof of how much you make, typically in the form of your most recent federal income tax return. If how much you earn has changed recently, you may need to submit alternative forms of documentation like your most recent pay stubs.

Free to apply
It’s free for you to enroll in federal income-driven repayment plans. Pretty great, huh? Since it’s free, make sure you don’t get fooled by a third party asking for money to process your application for you. You’ve got this on your own.

Reapplying every year
Once you are enrolled, you’re going to need to submit your application again every year to confirm how much you’re making at the time. It’s important to reapply every year so that you can keep your lower monthly payments and keep interest from adding up on your loan balance.