If you've recently finished school, facing the hectic job market and the potential volatility of entry-level salaries can be daunting, especially if you carry student loan debt. An income-driven repayment plan (IDR) can help new grads manage their student loan debt if they're having trouble making monthly payments under the Standard Repayment Plan.
IDR plans extend your payment period and allow you to make monthly payments based on your income. While interest may accrue with these plans, you might end up qualifying for loan forgiveness for your remaining debt after the required repayment period is complete. Here are a few reasons new grads may want to consider an IDR plan:
1. Manageable Monthly Payments
IDR plans make your student loan payments manageable by adjusting them according to your income and other socio-economic circumstances. Each plan type is based on a unique formula that calculates your monthly payment amount based on a percentage of your income and family size, which can reduce your monthly payment below what you would pay under the Standard Repayment Plan. This means that you could still make payments within your budget even if your income is low.
2. Choice of IDR Plans
There are currently four IDR plans to choose from, each with specific eligibility requirements and terms, so it's vital to understand them before choosing the best plan for your budget.
Note: that the REPAYE plan will be replaced by the SAVE plan, with different terms that aim to be even more favorable to borrowers. See studentaid.gov for more details. The table below provides a glimpse at the differences between each plan:
IDR Plan | Portion of Discretionary Income | Repayment Period |
Income-Based Repayment Plan (IBR) | 10-15% (depending on when you became a borrower) (Payment would never exceed the amount of a 10-year Standard Repayment Plan.) | 20-25 years (depending on when you became a borrower) |
Pay As You Earn (PAYE) | 10% (Payment would never exceed the amount of a 10-year Standard Repayment Plan.) | 20 years |
Income-Contingent Repayment Plan (ICR) | 20% (Discretionary income based on 100% of the poverty guideline) | 25 years |
Revised Pay As You Earn (REPAYE) | 10% | 20 years for undergraduates and 25 years for graduates |
Saving on a Valuable Education (SAVE) - coming soon | 5%-10%, depending on whether you have loans from undergraduate education, graduate education, or both (Discretionary income based on 225% of the poverty guideline) | 10 years for $12,000 loan Add one year for every $1,000 borrowed |
3. Adjustable Payments
IDR plans also provide flexibility in case your income or family size changes. If your income decreases, your payment amount will decrease-if your family size increases, your payment amount may decrease even more. However, if your income increases, your payment amount could also increase, but it will still be within your budget.
For example, if you lose your job, IDR plans allow you to adjust your monthly payments accordingly. Similarly, if you get married or have children, you can update your family size and adjust your payments based on your new circumstances.
4. Path to Student Loan Forgiveness
If you meet specific criteria, an IDR plan can lead to student loan forgiveness which eliminates the remaining balance after the required repayment period indicated by your chosen plan.
How an IDR Plan Benefits You
With IDR plans, you can manage your student loan debt to suit your financial goals.
These plans offer more manageable monthly payments, adjustable payments, and the possibility of having your outstanding balance forgiven after a certain period of faithful payments. If you feel like your student loans are too much to handle, looking into an IDR plan may be your best bet.
With the student loan payment and interest pause coming to an end this Fall, student loan interest will resume on September 1, 2023, and payments will be due in October. The time to figure out your student loan repayment plan is now.
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