Should I Use an Income-Driven Plan to Repay My Student Loan?

Last Update: September 8, 2021 • College Students • Loans •

Structuring your federal student loan repayments as a percentage of your income is a great way to stay on top of your debt and ensure outflows stay within your budget.

To choose a repayment plan that’s right for you, check out the four options below:

Revised Pay As You Earn (REPAYE) structures your payment as 10% of your discretionary income.
Pay As You Earn (PAYE) also structures your payment as 10% of your discretionary income, but the number cannot exceed the number from the REPAYE Plan above.
Income-Based Repayment (IBR) structures your payment as 10% of your discretionary income if you took out your student loan before July 1, 2014, and 15% of your discretionary income if you took out your student loan on or after July 1, 2014.
Income-Contingent Repayment (ICR) structures your payment as 20% of your discretionary income or a comparable 12-year fixed payment, adjusted for your income.

Now, the most important word you’ll notice above is ‘discretionary income.’

The U.S. Department of Education determines this figure by calculating the difference between your annual income and 100% to 150% of the poverty line income for a family of the same size that lives in the same state. Federal authorities consider this number an appropriate buffer to determine what you can afford to pay each month.

What Other Variables Used to Determine My Student Loan Repayment?

Beyond just annual income, other factors come into play to determine your monthly payment:

The size of your family and the state you live in

To calculate your discretionary income, a heavy emphasis is placed on comparable families and comparable regions. The U.S. Department of Education first assesses the poverty line income for a family of the same size that lives in your state to make the adjustment fair. In almost all cases, the larger your family, the lower your monthly payment under all of the income-based plans above.

Your tax status and whether you file a joint tax return

Your monthly payment is not affected when you file your taxes individually because it is based on the above-mentioned variables. However, if you file a joint tax return, your monthly payment will be determined as a combination of your and your spouse’s income. Because positive spousal earnings on a joint tax return increase your annual income, your federal student loan payment will increase in the process.

Whether or not your spouse has federal student loan debt

If your spouse also has outstanding federal student loan debt – and you file your taxes jointly – it can override the negative effect of joint income. Private student loans are not applicable, and only federal student loans work for this adjustment. Now, when there are two debt balances, you’re allowed to separate the two loans and structure each individually. Thus, your loan repayment reverts to what you saw using an individual tax return, which allows you to avoid the downside of joint status.

How Many Years will it Take to Repay My Student Loan?

Under each plan, payments are structured, so the entire balance is repaid over 20 to 25 years. As a side benefit, if a portion of your federal student loan balance is leftover at the end of your plan’s maturity, it qualifies for loan forgiveness, and you don’t have to repay the leftover amount.

REPAYE Plans can be repaid for over 20 years for undergraduates and 25 years for graduate or professional students.
PAYE Plans can be repaid for over 20 years.
IBR Plans could be repaid for over 25 years if you took your student loan before July 1, 2014, and 20 years if you took out your student loan on or after July 1, 2014.
ICR Plans can be repaid for over 25 years.

As well, if you suffer periods of unemployment or there are times where your annual income declines during the payback period, your monthly repayments can drop to zero and still count toward your total allowable 20 to 25 years.

Will My Student Loan Repayment Stay Constant Throughout The Entire Term?

Before jumping into an income-repayment plan, make sure you realize it’s not an installment loan, and payments are not fixed. Your monthly payments are variable with income-driven plans and will change if your income status or family makeup changes. Like we mentioned above, if you suffer economic hardship, your monthly payments can decrease all the way to zero. However, if you land a new job or your salary increases, your payments will rise right along with it. Second, your family makeup also plays an important role. If you get married or have children – and don’t file a joint tax return – your monthly payment will almost certainly decline.

To keep your income and family status current, you have to provide annual updates regarding your family and financial circumstances to your loan provider. Even if no changes have occurred, it’s still necessary to file an annual report. Your loan provider will send you a reminder letting you know an update is in order.

When a material change has occurred, you have to submit a new application for your income-repayment plan. Here, you fill out the reason for the new application as “to recalculate your payment immediately.”