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What is a student loan income-driven repayment plan?

Can’t afford your federal student loan payments? Enrolling in one of these plans may be a great move. (iStock)

If you’re having trouble making your federal student loan payments, one may want to apply for an income-driven repayment plan.

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Most federal student loans are eligible for an income-driven repayment plan, which adjusts your monthly payment to an amount that’s affordable based on your income. Here’s what you need to know about the four types of income-driven repayment plans, how to apply, and what your options are if you can’t afford an income-driven repayment plan or can’t qualify for one.

Income-Based Repayment Plan (IBR)

The most widely available income-driven repayment plan, an IBR Plan applies to Federal Family Education Loan Program (FFELP) Loans and Direct Loans. Your monthly payment amount under this plan will be between 10 percent and 15 percent of your discretionary income, depending on when your loans were disbursed. Borrowers with an IBR plan can qualify for loan forgiveness if they make on-time payments for 25 years for loans disbursed before July 1, 2014 or 20 years of on-time payments for loans disbursed after July 1, 2014.

Income-Contingent Repayment Plan (ICR)

An ICR plan will limit your monthly payments to the lesser of 20 percent of your discretionary income or the payment on a 12-year fixed-payment plan. The interest rate is fixed, so your payments will stay the same. ICR plans are available to borrowers who have Direct Loans (both subsidized and unsubsidized), Direct Consolidation Loans or Direct PLUS loans. The repayment period for an ICR plan is 25 years—after that, any remaining loan balance is forgiven. The caveat? Debt that’s forgiven under an ICR plan is considered taxable income, meaning you could owe Uncle Sam a large sum of cash when your debt is forgiven in 25 years.

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Pay As You Earn Repayment Plan (PAYE)

A PAYE plan will cap your loan payments at 10 percent of your discretionary income, making a PAYE Plan one of the most affordable types of income-driven repayment plans. The remaining balance on your loan can be forgiven after 20 years—though the forgiven amount could be taxed. Borrowers with Stafford, Direct Subsidized, Unsubsidized, PLUS Loans made to students, and consolidation loans that do not include loans made to parents are eligible for PAYE plans.

Revised Pay As You Earn Repayment Plan (REPAYE)

Like a PAYE Plan, a REPAYE loan will limit your federal student loan payments to 10 percent of your discretionary income, but your discretionary income is calculated using your adjusted gross income minus 150 percent of your state’s poverty guidelines for your family size.

There are two other key differences between REPAYE and PAYE plans. The first is REPAYE Plans don’t require borrowers to demonstrate financial distress in order to qualify for the program (PAYE Plans do). The second distinction is that if you’re married, your spouse’s income—and any federal student loan debt in your spouse’s name—is considered when determining your monthly payment under a REPAYE plan, which can drive up your loan payments.

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With a REPAYE plan, your remaining balance can be forgiven after 20 years repayment; however, if your plans were used for graduate or professional study, you won’t be eligible for loan forgiveness until 25 years. Direct Loan, Stafford, and Graduate PLUS borrowers can apply for a REPAYE plan.

How to apply for income-driven repayment

To see if you qualify for an income-driven repayment plan, you can submit an application at StudentLoans.gov or send a request to your student loan servicer directly. Be prepared to provide your most recent federal income tax return.

What you can do if you don’t qualify for income-driven repayment or can’t afford the payments

If you’re looking to lower your loan payments but can’t qualify for an income-driven repayment plan—or find out that you can’t afford the payments on an income-driven repayment plan—you still have a few options to lower your loan payments. The federal government offers extended repayment and graduated repayment plans—which aren’t based on your income—that can reduce your loan payments. Alternatively, you may be able to refinance your federal loans with a private lender to trim your monthly payments; the drawback, though, is private student loans don’t qualify for loan forgiveness.