Borrowers with federal student loans can choose an income-driven repayment (IDR) with payments that are capped at a set percentage of their income and provide loan forgiveness for any balances left at the end of repayment.
There are several types of income-driven plans, each of which can make monthly federal student loan payments much more affordable. In some cases, however, income-driven repayment plans can result in higher interest costs over time.
This guide will explain the basics of how these plans work and provide details on how you calculate your income to determine your monthly IDR payment.
Most borrowers with federal student loans, including those on an IDR program, do not have to make payments during the coronavirus crisis. The secretary of education temporarily suspended federally owned student loan payments and interest on March 20, 2020. This suspension has been extended multiple times and is active through January 31, 2022. The period in which loan payments are suspended will count toward earning loan forgiveness under income-driven plans and under Public Service Loan Forgiveness (PSLF).
What Is an Income-Driven Repayment Plan?
IDR plans are designed to make paying off student loans affordable, based on your wages and the size of your family.
There are four different IDR options that you can choose from if you have eligible federal student loans:
- Revised Pay As You Earn (REPAYE): Payments are generally set at 10% of your discretionary income. Any remaining balance from undergraduate study is forgiven after 20 years; the limit is 25 years if any loans were taken out for graduate or professional programs.
- Pay As You Earn (PAYE): Payments are generally set at 10% of discretionary income but can't exceed the amount you'd owe under the standard repayment plan. Any remaining balance is forgiven after 20 years of payments.
- Income-Based Repayment (IBR): Payments are generally set at 10% of discretionary income if you first borrowed after July 1, 2014, or 15% of income if you borrowed prior to that day. Payments can never exceed the amount you'd owe under the standard 10-year repayment plan; any remaining balance is forgiven after 20 years for new borrowers after July 1, 2014, or after 25 years for other borrowers.
- Income-Contingent Repayment (ICR): Payments are set at the lesser of 20% of discretionary income or the amount that would be due if you had a 12-year repayment plan with a fixed payment, adjusted for income. Any remaining balance is forgiven after 25 years of payments.
Student loan debt forgiven or discharged between 2021 and 2025 is tax-free due to the American Rescue Plan Act of 2021.
How Do You Calculate Income for an Income-Driven Repayment Plan?
There are just a few simple steps involved in calculating your income for income-driven repayment.
Determine Your Annual Income
This is the income that you earn from all sources throughout the year. It includes all taxable income from employment, unemployment benefits, dividends, alimony, and interest. It does not include untaxed income, such as public benefits from your state or Supplemental Security Income.
You can find out your annual income from your tax returns. However, if your income changed dramatically compared with the previous year, you may need to provide additional documentation.
Determine Whether Your Spouse's Income Also Counts
If you file your taxes as married filing jointly, both your and your spouse's earnings count when determining your income.
If you are married and file separately, generally only your income counts. However, under the REPAYE Program, your spouse's income must be factored in unless you cannot access information about their income or are separated.
Your monthly payments could rise substantially after marriage if your spouse has higher earnings than you or doesn't bring much student loan debt into the marriage.
Determine Your Family Size
This is the number of people in your family, including anyone who lives with you and receives more than half their support from you (including children and dependent adults).
Determine the Poverty Guideline for Your Family Size and Location
The Department of Education uses poverty guidelines from the Department of Health and Human Services to calculate your discretionary income. These are the 2021 guidelines:
|Number of People in Household||48 States & DC||Alaska||Hawaii|
|For nine or more, add this amount for each additional person||$4,540||$5,680||$5,220|
Calculate Your Discretionary Income
If you are on the PAYE plan, IBR plan, or your loan is in rehabilitation, you’ll calculate your discretionary income by taking the difference between your annual income and 150% of the poverty guideline for your location and family size.
If you are on the ICR plan, your discretionary income is calculated by taking the difference between your annual income and 100% of the poverty guideline.
Your payments will equal either 10% or 15% of your discretionary income, depending on your IDR plan.
The easiest way to calculate your monthly payment under an income-driven plan and other student loan payment plans is to use the loan simulator made available by Federal Student Aid.
Factors for Married Couples to Consider
When you file a tax return jointly with your spouse, the Department of Education will determine eligibility for IDR plans based on your combined income. It will also take combined student loan debt into account.
As a result, deciding to get married and file a joint tax return could have a big impact on your monthly student loan payment.
However, while married filing separately can keep student loan payments lower under some circumstances, this filing status has other consequences. It may make sense to talk with a tax expert about what filing option makes sense.