Repaying student loans can be intimidating—but there are ways to make them more manageable.
Refinancing your student loans is one way to lessen the burden—when you refinance you typically get a lower interest rate which can save you money. Refinancing is a great option for graduates who have a steady income; parents with PLUS loans can also refinance.
Check our student loan calculator to compare your rates.
However, if you’re experiencing difficulties because your federal student loan payments take up a large percentage of your income—and refinancing is not for you—one of the government’s income-driven repayment plans may be a better fit.
The federal government offers at least four income-driven repayment plans, and most loans are eligible for at least one of these. These plans include:
- ICR Plan – Income-Contingent Repayment Plan
- IBR Plan – Income-Based Repayment Plan
- PAYE Plan – Pay as You Earn Repayment Plan
- REPAYE Plan – Revised Pay as You Earn Plan
These plans have been designed specifically to help make it easier for you to manage your student loan debt, but they aren’t for everyone. Some require you to prove financial hardship and others are aimed at certain types of loans; eligibility for some plans might also change if you get married.
Let’s look further into each of these repayment plans to see who’s eligible, what benefits you might get from each, how long you can expect repayment to take, and potential downsides to each.
Income-Contingent Repayment Plan (ICR)
Anyone who has eligible federal student loans can qualify for an ICR plan. In fact, if you are a parent with a PLUS loan, you can even take advantage of this option.
While you cannot directly use an income-driven repayment plan (even an ICR plan) to pay off a PLUS loan, you can consolidate your Federal Plus loans or Direct PLUS loans into a Direct Consolidation Loan and use an ICR plan to pay that off. PLUS loans are not eligible for any other form of federal repayment plan.
Income-Based Repayment Plan (IBR) and Pay as You Earn Repayment Plan (PAYE)
If your student loan payments add up to more than your discretionary income, then you will likely be eligible for an IBR or PAYE plan. In either case, if an IBR or PAYE plan is less than the amount you’d be paying per month for a standard 10-year repayment plan, then you will qualify for one of these plans, so long as your loan originated on or before October 1, 2007, and you’ve received at least one disbursement since October 1, 2011.
Revised Pay as You Earn Plan (REPAYE)
Any borrower (other than parents with PLUS loans) can be eligible for a REPAYE plan.
The Pros of Federal Repayment Plans
In general, the greatest benefit of choosing any repayment plan will have your monthly loan payments based on your income, rather than on the total principal and interest of the loan itself.
With a REPAYE or PAYE plan, you’ll generally pay 10% of your discretionary income per month for your student loans. For the REPAYE, this will never exceed the amount you would pay on a standard 10-year repayment plan.
For the IBR plan, if you’re a new borrower (your loan origin date was on or after July 1, 2014), your payments will generally be 10% of your discretionary income, as well. For older borrowers, it’s typically 15% of income.
If you opt for an ICR plan, you’ll pay either 20% of your discretionary income, or you’ll pay the amount you would ordinarily pay on a 12-year fixed payment plan. Whichever of these amounts is less will be your monthly payment.
How Long Will Repayment Take?
Repayment plans vary in length. Typically, depending on your plan, you can expect the following:
- ICR Plan – 25 years
- IBR Plan – 20 years if you started borrowing on or after July 1, 2014, or 25 years if you started borrowing before this date.
- PAYE Plan – 20 years
- REPAY Plan – 20 years if all of the loans you’re repaying with the plan are for undergraduate studies, or 25 years if your plan covers loans for graduate school or professional study programs.
If you’re working in public service, the term could be shortened to 10 years.
The Cons of Federal Repayment Plans
As you can see, any federal repayment plan you opt for will extend your student loan repayment period. Taking longer to pay off your student loans can result in paying much more in interest over the long term.
Also, while you will be making smaller payments each month, you will still be in debt for a longer period. This could affect your credit rating, your ability to qualify for a mortgage loan to purchase a home, and/or have an affect on the terms you can get for other loans until you finish your repayment plan.
Another downside is that any debt that is forgiven after your term is over could be liable to be taxed—that forgiven debt may be treated as income by the IRS.
Student Loan Refinancing
Fortunately, for borrowers who want to pay less per month and/or reduce the length of time they’ll be paying off their loans, there is an alternative. If you have a regular income, and you know what you will be able to pay each month for your student loans, you may be able to improve your interest rate, decrease your monthly payments, and/or shorten your loan’s repayment period.