Most of us take out student loans for the same reason: to fund an education that, we’re told, will make a successful future possible.
But few of us saunter straight from school into a high-paying role in our chosen field. Usually you’ll encounter some bumps (and barista shifts) along the way — which is why many borrowers opt for income-driven repayment plans that can reduce the burden of monthly student loan bills.
So how does this approach actually suss out in the long term? To find out, we interviewed several borrowers about their experiences.
But first: a bit more about how income-driven repayment plans actually work.
What is income-driven repayment?
Income-driven repayment plans are programs through the U.S. Department of Education that allow you to repay your federal student loans at a payment determined by your income level — as opposed to the standard, 10-year fixed-payment plan.
Income-driven repayment plans are attractive because they can lower your monthly payments, making it easier to make ends meet when you’re fresh out of school and beginning your career.
There are four income driven repayment plans available:
- Pay As You Earn (PAYE), which calculates your monthly payment as 10% of your discretionary income divided by 12. Only Direct Loans are eligible for the PAYE plan, and you must be a new borrower as of October 1, 2007 and have received a disbursement on or after October 1, 2011 to qualify.
- Revised Pay As You Earn (REPAYE), which works just as PAYE does, but doesn’t carry the same time-based eligibility limitations.
- Income-Based Repayment Plan (IBR), which calculates your monthly payment as 15% of your discretionary income divided by 12, or 10% if you’re a new borrower. FFEL Program loans and Direct Loans are eligible for IBR.
- Income-Contingent Repayment Plan (ICR), which calculates your monthly payment as 20% of your discretionary income or fixed payments based on a 12-year loan term, whichever is lower. ICR is available for Direct Loans, and, uniquely among these options, Direct PLUS loans taken out by parents.
All of these programs are capped at a maximum of 20% of your discretionary income, and all offer forgiveness after 20 or 25 years of repayment.
However, these repayment plans have their drawbacks, too. Although your monthly payments may be lower, longer loan terms often leave you paying more in interest over time — and those low per-month payments could go almost entirely to interest.
You’ll also have to treat forgiven student loan debt as income on your taxes, which could make for a hefty tax burden when your debt is written off a couple of decades down the line.
What 3 borrowers say about income-driven repayment
Not sure whether an income-driven repayment plan is a good fit for you? We interviewed three borrowers who enrolled in these programs to learn more about the benefits and drawbacks of income-driven repayment.
Here’s what they had to say.
A young mom who wouldn’t do it again
Chloe Skupnick, an SEO marketing professional and the writer behind Young Fun Mom, took out $72,000 in student loans to attend Philadelphia University (now part of Jefferson) and another $38,000 or so to acquire her MBA through the South University online program.
When she got her first statement in 2015, the $300-ish monthly payment was overwhelming. She and her husband were “both flat freaking broke,” she recounts. “We were at the beginning of our careers.”
Enrolling in the Income-Based Repayment plan felt less like a choice than a necessity. The eventual loan forgiveness didn’t even enter the equation; she simply knew she couldn’t afford the standard payments.
By 2018, however, her higher income disqualified her from the program, leaving her with a minimum payment of $765 as part of the standard repayment plan. That’s on top of regular costs of living — plus the four children Skupnick and her husband clothe and feed.
Although the Skupnicks are lucky enough to have wiped out his loans entirely, allowing them to make heftier payments toward hers, the debt is something the family has to “constantly think about,” she says.
If she could go back in time, Skupnick says she’d try hard to find an alternative. “There’s still a lot of interest on my loans,” she says. IBR “didn’t really help much.”
She also warns others who are considering enrolling in an income-driven repayment plan to “read the fine print,” paying special attention to interest rates.
“Even when you’re in a hard financial place now, you still have to think about the future.”
A social worker who says it was their best option
Whitnee Goode is a Portland-based social worker who says their current position as a crisis counselor is “the most important work that I’ve done, ever.”
But fulfillment comes with a price tag: In this case, approximately $40,000 in student loans, plus interest, that they’ve yet to pay a dime on.
Because Goode’s income is low enough, an income-driven repayment plan allows them to pay $0 a month — which comes as a relief, as the standard payment would be $500. But Goode worries what will happen if their income level should rise, and even considers scaling back on their workload for fear of facing higher minimum payments.
What’s more, they’d like to continue their education: “I love being in school, being in a stimulating environment,” they say. “But it’s so expensive, it’s basically not accessible.”
Still, Goode says they’re glad IDR is an option, “even though they [income-driven plans] keep me poor.” They’re hopeful that working for a nonprofit will lead to loan forgiveness after 10 years under Public Service Loan Forgiveness, rather than waiting 20 years under IDR.
A freelance journalist who’s angry at the system
Kelly Smith took out $21,500 in student loans to attend the University of Tampa and scored a paid internship when she graduated in 2015. But on her salary of $35,000, the more than $300 standard student loan payment would have been a stretch.
So she enrolled in IBR, which brought the monthly bill down to $125. But two years and about $2,500 worth of payments later, her balance is $21,350; her payments have barely kept up with interest.
Then, after moving to New York and nearly tripling her income, Smith found that her IBR payments would have topped $500. She moved to a graduated repayment plan, which keeps her monthly payments low for now while enabling her to make progress on the principal balance.
But Smith says the last two years feel like sunk time, with the money she’s thrown toward her loan all but evaporating. “It’s really frustrating, but this is the reality of the system.”
For others considering IBR, she suggests looking toward the graduated payment plan first.
“If there’s any way you can work them [graduated payments] into the budget, you should absolutely go that route,” she says. “When you step back in two or three years and see your balance go down, it’s much more rewarding than saving a few bucks each month.”
How to apply for income-driven repayment
Despite its drawbacks, income-driven repayment is one way to ease financial burdens in the short term. Depending on your circumstances, you may explore this option.
If you do, applying for income-driven repayment plans is free and can be done in about 10 minutes online at studentaid.gov. Be wary of third-party companies that will charge you to “help” you file; the easy online application makes this unnecessary.
Other student loan forgiveness programs may also be able to help you find a way out from under the weight of your debt.
For example, Federal Perkins Loan cancellations help borrowers clear up to 100% of their Perkins Loans after spending a certain amount of time in eligible positions.