Income-Driven Repayment: Is It Right for You for 2025?

by Alex Hillsberg , MA

Student Finance & Loan Expert

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Rising college tuition costs are driving student loan debt up by thousands, and many Americans struggle to pay. The Biden-Harris Administration has approved more than $116 billion in student loan forgiveness in response, aiming to help 3.4 million federal borrowers save on student loan payments. 

Income-driven repayment plans offer some of the most beneficial terms for borrowers and can result in forgiveness for consistent payors. If you are heading off to college and looking at ways to pay, it can also be helpful to read up on loan repayment programs like IDR. We cover everything you need to know in this guide, including how it works, requirements to apply, rates, and repayment terms.

Key Things You Should Know About Income-Driven Repayment

• IDR plans base monthly payments on a borrower's income, which can provide significant relief for those with high debt and low income.
• Payments are spread over 20-25 years, and borrowers can apply for loan forgiveness at the end of the term.
• Payments under IDR plans must be lower than standard 10-year repayment plans.
• Alternatives include standard repayment plans, graduated repayment plans, and loan consolidation.

Table of Contents

1. What is Income-Driven Repayment?
2. How does the income-based repayment plan work?
3. What are the different types of income-driven repayment plans available?
4. What are the recent changes to income-driven repayment plans?
5. What are the pros and cons of income-driven repayment?
6. Who qualifies for income-based repayment?
7. How do I apply for income-driven repayment?
8. How can borrowers with bad credit optimize their repayment options?
9. What are common pitfalls to avoid when using an income-driven repayment plan?
10. How much will I pay under an income-driven repayment plan?
11. What are the tax implications of income-driven repayment forgiveness?
12. Are there special student loan benefits for military service members?
13. What are some alternatives to income-driven repayment plans?
14. Federal Student Loans vs. Private Loans: Choosing the Right Option for Your Education Financing Needs
15. Understanding the Role of Creditworthiness in Your Student Loan Options
16. Will pursuing an online doctorate enhance my career and income prospects?
17. Are online degrees a financially viable alternative to reduce student debt?
18. Are there additional financial aid options beyond income-driven repayment plans?
19. Can small loans for students serve as a practical supplement to traditional financing options?
20. How Can I Optimize Long-Term Financial Stability While Managing Student Loan Debt?
21. Other Things You Should Know About Income-Driven Repayment

What is Income-Driven Repayment?

As the name suggests, income-driven repayment (IDR) plans are federal student loan repayment options that base a borrower’s monthly payments on how much they earn. This can be a big relief to student loan borrowers, especially those with high levels of debt and lower incomes. In a 2023 study on the impact of IDR plans on borrower outcomes, Herbst found that income-driven repayment options helped reduce delinquencies by 22%. 

Monthly payments through an IDR plan are typically smaller and spread out over 20 or 25 years. At the end of the loan term, borrowers can apply to have their remaining loan balances forgiven.

How much can IDR plans reduce defaults on student loans?

How does the income-based repayment plan work?

Not everyone can qualify for free aid like scholarships for online students. Even those who do find it is not enough to cover the whole cost of college, which leads them to taking out loans. However, loans can be expensive and can become quite hard to repay as interest accumulates.

Income-driven repayment plans are a benefit for federal student loan borrowers. They make student loan payments more affordable by basing each borrower’s monthly payment on their income and family size. Payments can go as low as $0 for some borrowers with low incomes or big family sizes.

To maintain eligibility and keep your payment amount accurate, you'll need to submit your income and family size information annually through a process called recertification. This ensures your repayment plan reflects your current financial circumstances.

After continuous payments under an IDR plan (240 to 300 payments depending on the plan), any remaining loan balance may be forgiven. 

What are the different types of income-driven repayment plans available?

There are four types of income-driven repayment plans available for federal student loan borrowers. Each plan caps payments at a different percentage of discretionary income. The timeline for loan forgiveness also varies between IDR plans.

• Saving on a Valuable Education (SAVE) Plan. The SAVE plan replaced the Revised Pay As You Earn (REPAYE) plan. Payments are most affordable under this plan, since they are based on a smaller portion of discretionary income. Borrowers with initial balances of less than $12,000 can apply for loan forgiveness in just 10 years.
• Pay As You Earn (PAYE) Plan. The PAYE plan is available to borrowers with newer federal loans and is an eligible repayment plan for Public Service Loan Forgiveness. This is an ideal option for borrowers with relatively low incomes compared to their loan balances.
• Income-Based Repayment (IBR) Plan. An IBR plan is ideal for borrowers with moderate to high incomes and loan balances. Here, monthly payments are capped at a lower percentage of a narrower definition of discretionary income.
• Income-Contingent Repayment (ICR) Plan. The ICR plan is an option for borrowers with very high incomes and loan balances who don't qualify for other IDR plans. Payments are capped at the lesser of 20% of discretionary income or what you would pay on a fixed repayment plan over the course of 12 years, adjusted according to your income. 

IDR plans are very popular, particularly among low-income borrowers. Meko reports that REPAYE accounted for 40% of all IDR plan enrollment in 2021 and on student debt data, its popularity persists even after its transition to SAVE. ICR plans were the least availed, as the chart below shows.

What are the recent changes to income-driven repayment plans?

Rising levels of student debt and loan delinquencies are both unfortunate effects of rising college tuition. To help offset its effects, the Biden-Harris administration introduced the Saving on a Valuable Education (SAVE) plan in 2023. This income-driven repayment plan is a significant improvement from its predecessor REPAYE in for the following reasons:

• Borrowers with only undergraduate loans will have their monthly payments based on 5% of their discretionary income under SAVE, down from 10% under REPAYE
• The income exemption is extended from 150% of the federal poverty line to 225%
• Borrowers with original loan balances of $12,000 or less may qualify for forgiveness after just 10 years of payments under SAVE
• More that one million borrowers under $15 an hour qualify for $0 monthly payments

All borrowers under the REPAYE plan were put under the SAVE plan, which for many resulted in halved payments. According to estimates by the Department of Education, borrowers earning above $15 an hour can save over $1,000 a year on payments under SAVE compared to other IDR plans.

What are the advantages and disadvantages of income-driven repayment?

IDR plans can make loans more manageable on a tight budget. Payments are capped based on a percentage of your income after essential expenses, which means you won’t have to deal with payments that are bigger than your monthly paycheck. Your remaining loan balance may also be forgiven after years of consistent payments. Most IDR plans last 20 years, which lines up with the average time to pay off student loans.

Even so, these plans may not be the best option for everyone, particularly those with low amounts of student loan debt or those expecting to increase their income significantly in the future. Spreading the debt out over decades means you will pay more in interest over time. Moreover, your student loan payments will increase as you grow your income.

Who qualifies for income-driven repayment?

Income-driven repayment plans are exclusively for borrowers with federal student loans. Private loans don't qualify. This means if you have a mix of federal and private loans, you'll need to consolidate the federal loans into a Direct Consolidation Loan to participate in an IDR plan.

Your income and family size will affect your application for an IDR plan. The Department of Education considers your Adjusted Gross Income (AGI) from your tax return to determine if your monthly payment would cause financial hardship under a standard repayment plan.

How do I apply for income-driven repayment?

How can borrowers with bad credit optimize their repayment options?

Although federal income-driven repayment plans do not require a high credit score, many borrowers with lower credit ratings may face challenges when exploring refinancing or consolidation alternatives. Evaluating your overall financial health and considering credit-enhancement strategies can broaden your available options. Additionally, examining specialized financing products alongside federal solutions may provide a clearer path to sustainable repayment. For more detailed guidance on alternative lending avenues, review student loans for bad credit.

What are common pitfalls to avoid when using an income-driven repayment plan?

Borrowers may encounter several challenges that can undermine the benefits of income-driven repayment plans. Misjudged income projections, missed recertification deadlines, and insufficient documentation can unexpectedly shift payment amounts. Additionally, unplanned changes in financial circumstances and inadequate strategic adjustments may lead to higher interest accrual or tax liabilities upon loan forgiveness. Addressing these concerns through proactive financial planning and career advancement—such as exploring opportunities with 6-month certificate programs that pay well—can help mitigate risks and enhance long-term stability.

How much will I pay under an income-driven repayment plan?

By law, your IDR payment must generally be lower than the payment you'd make under the standard 10-year repayment plan. This can be a significant benefit, especially for recent graduates or borrowers with high debt-to-income ratios. For example, a fresh graduate paying off on an hourly wage of less than $15.

How much you pay will depend on the income-driven repayment plan you sign up for. We have included a table of IDR plans with interest rates and terms so you can compare. 

To get a personalized estimate, you can use the IDR Estimator tool on the Department of Education website. You can use this to see how your monthly payment might differ under various IDR plans.

What are the tax implications of income-driven repayment forgiveness?

Income-driven repayment forgiveness can provide significant relief but may also trigger a taxable event. Under current IRS guidelines, the amount forgiven is considered taxable income, potentially increasing your tax liability in the year it is applied. Various factors—including your overall income, filing status, and any applicable deductions—can influence the resulting tax burden. Consulting a tax professional may help you devise strategies to mitigate unexpected liabilities. Additionally, exploring cost-effective educational paths, such as an easiest bachelor degree, may reduce future borrowing needs and improve long-term financial stability.

Are there special student loan benefits for military service members?

Military service members and veterans often qualify for tailored student loan repayment benefits that reflect their unique financial circumstances and service-related opportunities. Programs available to this group may complement standard income-driven repayment plans with added features such as expedited forgiveness options, reduced interest rates, or specialized consolidation pathways. Additionally, education providers designed to serve military populations can further streamline your financing strategy. For insight into institutions that accommodate these requirements, consider exploring military friendly online universities that offer flexible learning options and cost-effective programs.

What are some alternatives to income-driven repayment plans?

While income-driven repayment plans can be a great help, they are not the best option for everyone. There may be more practical ways to repay student loan debt, especially if your loan amount is low or if you have multiple loans.

• Standard Repayment Plan. This is the most common repayment plan, with Hillman et. al reporting an enrollment rate of 64% among undergraduate borrowers. Under the standard repayment plan, borrowers get a fixed monthly payment that covers their loan balance in 10 years. The predictability of a fixed payment can be appealing for some borrowers, especially those with stable income and manageable debt.  However, the initial payment might be higher compared to IDR plans. This could be a good option for borrowers with lower debt amounts, like those paying off community college tuition.
• Graduated Repayment Plan. This plan starts borrowers off with lower monthly payments, with gradual increases over the repayment term. This can be a good choice for recent graduates or those with fluctuating income.

• Loan Consolidation. If you have multiple federal student loans, you can combine it into a single loan with a single monthly payment and interest rate. This can be a good option for borrowers with multiple federal loans seeking a more streamlined repayment structure.

Federal Student Loans vs. Private Loans: Choosing the Right Option for Your Education Financing Needs

When planning to finance your education, it's crucial to evaluate all options, including federal student loans, private student loans, and alternative financing paths like trade school funding. Each has distinct benefits and drawbacks depending on your goals and financial circumstances.

Federal Student Loans

The Standard ChoiceFederal student loans are often the go-to choice for many borrowers because they offer fixed interest rates, income-driven repayment plans (IDRs), and forgiveness opportunities. Federal loans provide protections, such as deferment, forbearance, and repayment flexibility, making them a safer option for those with unstable income or high financial need.

Private Student Loans

What to KnowPrivate student loans, offered by banks or credit unions, can help cover costs when federal loans fall short. However, they lack the flexible repayment terms and forgiveness options of federal loans. Private loans often come with variable interest rates, which could result in higher costs over time. These loans typically require a strong credit score or a co-signer, limiting access for some borrowers.

Trade School Financing as an Alternative

Trade school programs often cost less than traditional college degrees, making them an attractive alternative for career-focused individuals. Federal and private loans can also be used for trade schools, but it’s worth exploring specialized student loans designed for vocational training. For insights on financing trade school education, check out our comprehensive guide, can you get student loans for trade schools, which explains eligibility, options, and loan terms.

Understanding the Role of Creditworthiness in Your Student Loan Options

Your credit history and financial background significantly influence the type of student loans you qualify for, especially when federal loans are not sufficient to cover your education costs. While federal student loans do not require a credit check, private student loans often have stringent credit requirements that can pose challenges for borrowers without an established credit history. In such cases, seeking a cosigner student loan may enhance your approval chances because lenders evaluate the creditworthiness of both the primary borrower and the cosigner. However, relying on a cosigner has its complexities. The cosigner becomes equally responsible for your debt, which means their credit score and financial future are also at stake.

When weighing your options, it is equally important to consider building your own credit via smaller lines of credit or responsible financial management, which can improve your independence in securing loans. This may take time, but it sets you up for stronger financial health in the long term. Balancing these considerations ensures a more informed path to financing your education effectively.

Testimonials About Income-Driven Repayment Plans

"With two kids in diapers, our budget is tight. Our IDR plans let us manage our student loans on teacher salaries. It's been a great relief for our growing family." - Michael

"Working in public service is rewarding, but the pay isn't always great. My IDR plan helps me stay afloat on my student loans while I work towards forgiveness through PSLF." - Mariah

"Switching careers was a big decision, and the pay cut was real.  There was no way I could afford my old student loan payments.  Income-Driven Repayment lets me keep my head above water financially while I pursue my new path." - Kim

Will pursuing an online doctorate enhance my career and income prospects?

Online doctorate programs can offer a significant competitive edge by deepening subject matter expertise and positioning professionals for leadership roles, which may lead to increased earning potential. Evaluating these programs involves examining program costs, accreditation standards, and post-completion career trajectories. Prospective students should consider detailed outcomes such as salary increments and job market demand before enrolling. For a thorough look at cost-effective options, see cheap online doctorate programs.

Are online degrees a financially viable alternative to reduce student debt?

Considering the high costs of traditional education, accredited online programs may offer a cost-effective alternative that can help lower overall borrowing. For some students, these programs present a pathway to achieving career goals with reduced debt exposure. Evidence suggests that institutions which are online colleges respected can deliver competitive outcomes while potentially decreasing the need for extensive student loans. Analyzing such alternatives alongside income-driven repayment strategies may enhance overall financial planning by aligning educational expenses with long-term economic objectives.

Are there additional financial aid options beyond income-driven repayment plans?

Beyond federal income-driven repayment options, borrowers can explore supplemental funding sources that do not require repayment and help reduce overall debt accumulation. Alternative aid avenues include scholarships, employer-sponsored education assistance, tax credits, and specialized grants that target vocational studies. For instance, prospective cosmetology students may benefit from grants for cosmetology school, which can significantly offset educational expenses without increasing long-term liabilities. Evaluating these additional funding options alongside traditional loan repayment strategies can lead to a more comprehensive and sustainable financial plan.

Can small loans for students serve as a practical supplement to traditional financing options?

While federal loan programs and income-driven repayment plans are designed for long-term debt management, some borrowers may benefit from alternative financing tools to cover unexpected educational expenses. Utilizing small loans for students can offer immediate, flexible support for short-term financial gaps. These targeted financing solutions typically feature accessible credit criteria and shorter repayment terms, allowing borrowers to maintain steady academic progress while avoiding excessive long-term debt. Careful integration of such options into a broader budgeting strategy can enhance overall financial resilience and ensure that supplemental funds are used judiciously to support educational advancement.

How Can I Optimize Long-Term Financial Stability While Managing Student Loan Debt?

To enhance long-term financial outcomes, consider integrating strategic planning with your repayment approach. Tactics include diversifying savings, evaluating prepayment options when possible, and periodically reviewing your investment portfolio to offset accrued interest. Additionally, researching alternative educational pathways—such as enrolling at cheapest online universities—can reduce the need for excessive borrowing. Regular financial reviews and adherence to adaptive repayment strategies further support a stable transition into retirement planning while managing student loan obligations.

Key Findings

• The average student loan debt exceeds $29,000, highlighting the need for manageable repayment options.
• About 3.4 million federal borrowers can benefit from loan forgiveness under the Biden-Harris Administration.
• IDR plans can  reduce student loan delinquencies by 22%.
• REPAYE plan enrollment accounted for 40% of all IDR plan enrollments in 2021 (Meko).
• Borrowers earning above $15 an hour can save over $1,000 a year on payments under the SAVE plan.
• A minimum 240 consecutive payments are required for loan forgiveness under IDR plans.

Other Things You Should Know About Income-Driven Repayment

Is IDR forgiveness automatic?

IDR forgiveness isn't automatic. After making consistent monthly payments under an IDR plan for the required repayment term, you will need to submit a separate application for loan forgiveness. The Department of Education processes these applications and discharges any remaining loan balance.

Can you pay off an income-driven repayment plan early?

There is no penalty for paying off your student loan debt early under an income-driven repayment plan. Paying off the remaining balance before the end of the repayment period can save you money in interest. When you pay your loans off early, you can also avoid the tax liability that may come with loan forgiveness.

What happens if I don’t recertify my IDR?

If you fail to recertify your IDR by the annual deadline, you may be removed from the plan and placed on the standard 10-year repayment plan. Your monthly student loan payments may increase since the IDR plan's income-based calculation will no longer apply. To regain eligibility for IDR, the borrower will need to reapply and provide the necessary income documentation.

References:

• College Board. (n.d.). Trends in Student Aid Highlights. College Board Research. Retrieved July 19, 2024, from https://research.collegeboard.org/trends/student-aid/highlights
• Department of Education. (n.d.). Income-Driven Plans Questions and Answers. Federal Student Aid. Retrieved July 18, 2024, from https://studentaid.gov/manage-loans/repayment/plans/income-driven/questions
• Department of Education. (n.d.). Income-Driven Repayment Plans. Federal Student Aid. Retrieved July 19, 2024, from https://studentaid.gov/manage-loans/repayment/plans/income-driven
• Department of Education. (n.d.). The Saving on a Valuable Education (SAVE) Plan Offers Lower Monthly Loan Payments. Federal Student Aid. Retrieved July 19, 2024, from https://studentaid.gov/announcements-events/save-plan

• Meko, T. (2022, April 13). Income-Driven Repayment of Student Loans. Urban Institute. Retrieved July 18, 2024, from https://www.urban.org/sites/default/files/2022-04/Income-Driven%20Repayment%20of%20Student%20Loans.pdf