What is an income-driven repayment plan or IDR? A guide to 4 types of IDRs

As today’s college graduates leave school with more student loan debt than ever, selecting the right repayment plan for your needs is crucial to avoid delinquency and serious damage to your credit.

The Department of Education launched the SAVE Plan in 2023 to provide additional relief to federal borrowers. This means there are now four distinct income-driven repayment plans, including the new SAVE Plan, and each has slightly different guidelines as well as benefits.

What are the Differences Between Income-Driven and Standard Repayment Plans

Although using one of the income-driven repayment plans (or IDRs) may make your federal loan payments more manageable month to month, it could take you longer to pay off the loan.

Here are the general tradeoffs between IDRs plans and Standard Repayment Plans. We recommend familiarizing yourself with these before graduation or the latest before the grace period on your federal loans ends.

Which Repayment Plan is Best For You?

Using one of the government’s income-driven repayment plans can be an option if you’re experiencing financial difficulty or earning a low salary compared to your student loan balance. Depending on your income, your payment could be as low as $0 per month.

Under the new SAVE plan, if you make a full monthly payment but it’s not enough to cover your interest, the government will cover the rest of that interest for you. However, other plans may not have this option.

Under the PAYE Plan, which is an income-based repayment plan (a type of income-driven plan), if you qualify, your payment will be  less than what you pay under Standard Repayment. But,  to take advantage of the lower payment, you’re extending the time you’ll have to pay off your loan and could be in debt longer and pay more interest than under Standard Repayment.

With standard repayment, your monthly payments are generally higher than they would be under an income-driven plan , but you’re more likely to pay off your student loan balance in a shorter amount of time and with less interest.

Another option is refinancing your student loans¹ with a private lender. Refinancing could help lower your rate² and allow you to customize your monthly payment based on your own budget.

Can your budget handle a non-fixed payment amount?

All income-driven repayment plans (including SAVE) require you to recertify your income and family size every year so your servicer can recalculate your monthly payment based on program guidelines.

Certain life changes – including a new marriage and filing taxes jointly – can cause your monthly payment to increase substantially or even make you ineligible to make payments tied to your salary.

If that happens, it’s important to know your monthly payments will never exceed what you would pay with the standard 10-year plan; however, non-fixed student loan payments — meaning payments that could change every year based on your annual income — can make it difficult to manage your budget, especially if you’ve taken on other debt, such as a mortgage or car loan.

What about loan forgiveness?

If you work in the government or nonprofit sector, you may be able to have your loan balance forgiven after 10 years with income-based repayment. With public service loan forgiveness, the amount forgiven is not federally taxable, but you may be taxed by your state on the amount forgiven.

Teachers also have a loan forgiveness option that requires them to teach at a low-income school or educational service agency. You may be eligible for up to $17,500 of forgiveness in Direct Subsidized and Unsubsidized Loans. However, there are other qualifications that you must meet to qualify for this program.

If you don’t work in public service, there is the prospect of future forgiveness for all borrowers. However, the Supreme Court has struck down one federal program, and new forgiveness proposals are being challenged in the courts.

Is IDR right for me?

Whether income-driven repayment is right for you depends on a variety of factors. If you’re still in school and applying for loans, don’t let the allure of possible loan forgiveness available under income-driven repayment cause you to take on more student debt than you otherwise would.

If you’ve already graduated, you need to weigh the benefits of a lower payment now against the potential impact of a higher debt load over a longer period of time. You might also consider refinancing your student loans to reduce your overall interest rate and pay off your balance faster.

A Guide to the 4 Types of Income-Driven Student Loan Repayment Plans

Once you decide that an income-driven repayment plan is a strong fit for you, you need to pick your plan. There are four options, and each has its own pros and cons.

SAVE Plan

The Saving on a Valuable Education (SAVE) Plan was proposed after student loan forgiveness was struck down by the Supreme Court. It is the newest income-driven repayment (IDR) plan, and like other IDR plans, the SAVE Plan calculates your monthly payment amount based on your income and family size with one key difference that will lower payments for many more borrowers (compared to other IDR plans).

The SAVE Plan is a revised version of the REPAYE Plan. If you were on the REPAYE Plan, you will automatically get the benefits of the SAVE Plan. The SAVE Plan is also being challenged in the courts.

Highlights of the SAVE Plan include:

• This is an IDR plan, so it bases your monthly payment on your income and family size.

• Lowers payments for almost all people compared to other IDR plans because your payments are based on a smaller portion of your adjusted gross income (AGI).

• Includes an interest benefit: If you make your full monthly payment but it is not enough to cover the accrued monthly interest, the government covers the rest of the interest that accrued that month. This means that the SAVE Plan prevents your balance from growing due to unpaid interest.

Lower payments for more borrowers

What makes SAVE different is that it increases income exemptions from 150% to 225% from the poverty line. In other words, with SAVE you could lower your payment by much more than other IDR plans. Your new monthly payment is calculated through your discretionary income – how much money you should have left over once taxes, bills, and the cost of essentials have been deducted from your monthly salary.

The government calculates your discretionary income by taking the difference between your adjusted gross income and 225% of the U.S. Department of Health and Human Services Poverty Guideline amount for your family size.

Because your required monthly payment is a percentage of your discretionary income, your payment will be $0 if your discretionary income is $0 (if you don’t have anything left over after all of your bills are paid).

For example, for 2024, 225% of the Poverty Guideline amount for a family size of one (in the 48 contiguous states) is $33,885, which means that if your annual income is equal to or less than $33,885 and your family size is just yourself, your discretionary income is $0, and your monthly payment will be $0. The same is true for a family of four with an annual income of $70,200 or less*.

*Examples are for illustrative purposes only

Interest benefits to keep debt down

The SAVE Plan also includes an interest rate benefit that keeps your student loan balance from growing. It eliminates 100% of the remaining monthly interest from subsidized and unsubsidized loans, and here’s how it works: If your payment of $50 in interest accumulates each month and you have a $30 payment, you won’t be charged for the remaining $20 interest*.

*Examples are for illustrative purposes only

In the summer of 2024, additional benefits of the SAVE plan will go into effect; aimed at helping those with undergraduate student loans.

Income-Based Repayment Plans (IBR Plans)

The IBR Plan is another type of income-driven repayment plan available to borrowers. To be eligible for the IBR plan the payments you are making must be less than what you would pay under a Standard Repayment plan during a 10-year period. This means that generally your federal student loan debt is higher than your annual discretionary income, or represents a significant portion of your annual income. Your discretionary income is calculated as the difference between your adjusted gross income and 150% of the federal poverty guideline for your family size and state.

Technically there are two different IBR plans, one for borrowers who took out their first loan before July 1, 2014, and have a partial financial hardship (Original IBR), and another for those who took out their first loan on or after July 1, 2014 (2014 IBR). There are some differences between the plans to be aware of.

Your repayment amount will be one of the following:

• Generally, 10% of your discretionary income if you’re a new borrower on or after July 1, 2014*, but never more than the 10-year Standard Repayment Plan amount, or

• Generally, 15% of your discretionary income if you’re not a new borrower on or after July 1, 2014, but never more than the 10-year Standard Repayment Plan amount

In both cases, the amount should never exceed the 10-year amount you would pay on a standard repayment plan. The duration of the 2014 IBR plan is 20 years, and 25 years for the Original IBR plan.

If you qualify for the IBR Plan it can help lower your monthly payments and at the end of the plan, your loans are eligible for forgiveness. However, you should calculate the amount of interest you will pay during your repayment period, and the amount forgiven at the end of your loan repayment plan might be taxable income.

Income-Contingent Repayment Plan (ICR Plan)

The ICR Plan does not have an income eligibility requirement, so it can be a good fit for those who don’t qualify for other plans but do want to lower their monthly payments. Borrowers can also consolidate their PLUS Loans into a Direct Loan to use the ICR Plan. This is not an option for the other three plans.

Your repayment amount will be one of the following:

• 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

The repayment duration is 25 years, and afterward, you may be eligible for loan forgiveness for the amount leftover. One important consideration is that the ICR plan has the highest potential payment amount of all the other income-driven plans, and might even be more than Standard Repayment for some. As with all the plans, the loan amount forgiven at the end of your repayment plan might be taxable income.

Pay As You Earn Repayment Plan (PAYE Plan)

Like IBR, to be eligible for PAYE you must demonstrate financial need. You also must be a new borrower as of Oct. 1, 2007, and have received a disbursement of a Direct Loan on or after Oct. 1, 2011. Your payments under the PAYE plan must also be less than they’d be on the Standard Repayment Plan.

Your repayment amount will be:

• Generally 10% of your discretionary income, but never more than the 10-year Standard Repayment Plan amount

The duration of the PAYE plan is 20 years, at which time you may be eligible for loan forgiveness for the amount leftover. This plan generally offers the lowest payment amount for all eligible borrowers, but is also only to the smallest group of borrowers at this time. Again, the loan amount forgiven at the end of your repayment plan might be taxable income, which should be considered when signing up.

Revised Pay As You Earn Repayment Plan (REPAYE Plan)

It’s important to note that the SAVE Plan is the newest version of the REPAYE Plan with expanded benefits. If you or a member of your household was on the REPAYE Plan they will be automatically enrolled in the SAVE Plan and can take advantage of its benefits.

This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

¹ Please note that you may lose benefits associated with your underlying federal loans, such as federal Income-driven Repayment Plans (an example of which is the SAVE plan), Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options, if you refinance into a private loan. If you file for bankruptcy, you may still be required to pay back this loan.

² Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for the total cost of your refinanced loan.