What to Consider Before Choosing an Income-Driven Repayment Plan

April 20, 2016

Connect Member

Writer at Credible, an online marketplace for student loan refinancing.


Lowering your monthly student loan payments may sound tempting, but signing up for an income-driven repayment plan is not necessarily for everyone. There are many reasons why someone would want to decrease monthly installments to fit his or her income, but it shouldn’t be restricted to having a few extra dollars each month to go towards your food budget. In fact, a lesser plan can make paying off your balance far more time-consuming and more expensive.

Here are some things you should know before requesting for that lower monthly rate.

It’s Not for Everyone
You should really only consider lowering your monthly payment if:

  • You cannot afford to make your monthly payment
  • You’re at risk for defaulting or missing a payment deadline
  • You qualify for, and will benefit from, a public loan forgiveness program (more on this below)

And, you should know what your options are that fit your circumstance. You can find out more details about each one here. Here are four options of an Income-Driven Repayment Plan:

  • Revised Pay As You Earn Repayment Plan (REPAYE Plan)
  • Pay As You Earn Repayment Plan (PAYE Plan)
  • Income-Based Repayment Plan (IBR Plan)
  • Income-Contingent Repayment Plan (ICR Plan)

You May End Up Paying More Over Time
Income-driven repayment plans lower your monthly payments simply by stretching them out over a longer period of time. Because you have more time to pay off the loans, you can afford to make smaller payments on a monthly basis. But here’s the catch: You’ll be incurring interest over the longer span of your loan. In other words, a longer loan term usually means you’ll be paying more in total interest over the life of your loan.

Payments on plans like these are attractive because the pending loan balance can be forgiven after 20 or 25 years if you’re qualified for The Public Service Loan Forgiveness program. However, loan forgiveness comes with its own strings attached. For example, the amount that is forgiven is still counted as taxable income. So even if you do qualify for loan forgiveness, you might have to pay a pretty hefty tax bill.

Note that student loan debt forgiven after 10 years under the Public Service Loan Forgiveness program is not taxable.

You Might Not Be Eligible for These Plans
Many income-driven repayment plans are only available to certain borrowers. For example, to qualify for Pay As You Earn Repayment Plan you 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. Also, Income-Based Repayment Plan for new borrowers is restricted to those who took out their first loan on or after July 1, 2014.

Other less restrictive Income-Driven Repayment Programs, like Revised Pay As You Earn Repayment Plan and Income-Contingent Repayment Plan, also offer loan forgiveness, but sometimes on less generous terms. For undergrads, loan forgiveness is more forgiving under REPAYE, because only half of the unpaid interest is counted (and taxed) in the total amount forgiven. For grad students however, it takes 25 extra years to qualify for loan forgiveness.

Consider Refinancing Your Loans Instead
If your goal is to reduce your monthly payment by extending your loan term, refinancing with a private lender at a lower interest rate can reduce or eliminate the additional interest payments that you’d otherwise make if you simply increased your loan term.

For example, borrowers who used Credible to decrease their monthly payments by refinancing into loans with longer repayment terms cut their monthly payments by an average of $309 a month.

But, Always Read the Fine Print
Refinancing federal student loans with a private lender isn’t for everyone. You’ll forego some borrower benefits, such as the option for an income-driven repayment plan or the potential for loan forgiveness after 10, 20 or 25 years of payments.

Ultimately, repayment plans and loan forgiveness have pros and cons depending on your loan situation. You could end up paying much more over the life of your student loan through interest, or end up paying more in taxes. Consider the facts above and talk to your provider to see what the best option for you long-term will be.

Ariha Setalvad is a member of the DailyWorth Connect program. Read more about the program here.