Income-Driven Student Loan Debt Relief

If you have student loan debt, you have plenty of company. More than 43 million Americans had a total of $1.76 trillion in student loan debt by the end of 2021, and that number is growing six times faster than the national debt.

Most people who have student loan debt have trouble paying at some point. Some 78% of borrowers report being late on at least one payment, and 25% default on their student loans within five years of graduation.

The best solution for those who can’t afford to repay student loan debt is income-driven repayment (IDR).

Income-driven repayment is a group of government programs that base repayment of federally guaranteed student loans on the borrower’s income. They adjust payments as your income increases or decreases. There are four income-driven plans available:

• Income Based Repayment (IBR)
• Pay As Your Earn (PAYE)
• Revised Pay As You Earn (REPAYE)
• Income Contingent Repayment (ICR)

The average student debt is $37,501, which makes the average monthly payment under the 10-Year Standard Repayment plan $381 a month. That can be a big chunk of someone’s monthly income. If you can’t afford the SRP, or even if you’d like different options to repay student loan debt, an income-driven repayment plan may work for you.

What Are Income-Driven Repayment Plans?

Income-driven student loan repayment began as Income-Based Repayment, a little-used federal program that was beefed up during the Obama administration when student loan debt was soaring.  Most borrowers with federally guaranteed loans use the 10-Year Standard Payment Plan, which divides total owed into 120 fixed payments.

Income-Based Repayment was devised to help student loan borrowers who couldn’t afford that plan.

IBR is now one of four income-driven repayment plans for federally guaranteed student loans. Borrowers can be behind on payments, but loans in default aren’t eligible. Payment is based on an income formula that takes into account family size, state of residence, the federally set poverty rate and more, varying among the four plans.

Each plan has different payoff requirements and eligibility standards, as well as allowing different types of loans. With all of them, once the repayment period ends, the balance of debt is forgiven.

Income-Based Repayment (IBR) and Pay as You Earn Repayment Plan (PAYE), are aimed at low-income borrowers. Revised Pay as You Earn Repayment Plan (REPAYE) and Income-Contingent Repayment (ICR) are for all student borrowers of federally guaranteed loans.

With all the plans, payment amount changes as the borrower’s income does, whether increasing or decreasing. Borrowers in all plans must reapply yearly, recertifying income and family size, though if a borrower’s income takes a big hit, the borrower can recertify mid-year.

Pros and Cons of Income-Driven Student Loan Repayment

Income-Driven student loan repayment plans have benefits to those looking to pay off their student loan debt, but there are also drawbacks.

Pros of Income-Drive Student Loan Repayment

• Usually lowers your monthly federal student loan payments
• Once the repayment period is over, the balance is forgiven
• Payments change – up and down – according to changes in income, and family size

Cons of Income-Driven Student Loan Repayment

• Borrowers will likely pay more interest over the extended payment periods
• You may have to pay income tax on the forgiven balance after the repayment period ends
• Parent-borrowed loans aren’t eligible under most of the plans
• Loans in default aren’t eligible

Income-Based Repayment Option

Income-Based Repayment is aimed at low-income, or no-income, borrowers. This is the only plan under which FFEL program loans are eligible. Most graduate and undergraduate loans are also eligible.

Those who took out student loans after July 1, 2014, pay 15% of their discretionary income over 25 years. Those who borrowed before that date pay 10% over 20 years.

If you’re eligible for the 10-year Standard Repayment Plan, your income is too high to qualify for these plans. However, if your income decreases or your family increases, you can reapply.

Pay as You Earn Repayment Plan

The PAYE Plan is for “new borrowers,” which means that those who qualify must not have had an outstanding balance on a Direct Loan or FFEL Program loan when borrowing from either of those programs after Oct. 1, 2007, and the borrower must have received a disbursement of a Direct Loan after Oct. 11, 2011.

PAYE also is for low-income borrowers, who must meet income eligibility. The repayment period is 20 years, and payment is generally 10% of the borrower’s income, without exceeding the 10-Year Standard Repayment Plan (SRP).

Revised Pay as You Earn Repayment Plan

Any borrower with eligible federal student loan debt may use the REPAYE program. Payment is generally 10% of the borrower’s discretionary income. The payment period is for 20 years if the loans were for undergraduate study and 25 years if any of the loans were for graduate or professional study.

Payment is based on income and family size, even if it exceeds the 10-year SRP amount, which means that it can be higher than the 10-year SRP and the borrower would still be eligible.

Income-Contingent Repayment

Income-Contingent Repayment is the only income-driven plan that includes parent PLUS loan borrowers, though with a restriction. Parents with PLUS loans can’t directly repay them under this plan unless they consolidate Direct PLUS Loans or Federal PLUS Loans into a Direct Consolidation Loan.

ICRs have a 25-year repayment, and the borrower pays whichever is less — 20% of discretionary income or what they would pay on a repayment plan with a fixed payment over 12 years, adjusted according to income.

Debt Management Plan

Debt management plans are a way to deal with credit card debt that often occurs when student loan borrowers run out of money at bill paying time.

While debt management plans generally don’t include student loan debt, an income-driven student loan repayment plan combined with debt management plan for your credit card debt, may help you get your finances on track.

If you feel overwhelmed by debt, you may want to contact a nonprofit credit counseling agency, like InCharge Debt Solutions. A certified counselor can discuss your financial situation, including budgeting and debt management options. Counselors are trained to educate consumers on how to manage their money effectively and are required to offer advice that’s in the client’s best interest.

Debt management options may include a traditional 3-5 year debt management program or InCharge’s Less Than Full Balance program, which allows consumers who qualify to pay 50%-60% of their credit card debt in 36 months or less.

Student loan debt isn’t confined to traditional student loans – 24% of those who owe money for their education used credit cards to pay for some of it. Beyond that, those mired in student loan debt may be maxing out credit cards to pay other bills.

Getting behind, or defaulting on, student loan debt can lead to financial problems that can linger for decades, including bad credit, loss of benefits, a decline in income from wage garnishment and the school withholding proof of attendance or transcripts.