If you’re struggling to pay off your student loans, an income-driven repayment plan can help you stay on track. Here’s what you need to know.

If you have student loans that you are struggling to repay, the looming debt and monthly payments can get stressful quickly. Fortunately, you don’t have to skip meals or move back in with your parents to make ends meet. An income-driven repayment plan can lower your monthly payment to an amount you can more easily afford right now.

But is income-driven repayment right for you? Understanding your options will help you choose the plan that works best for you, in both the near term and in years to come.

What Is Income-Driven Repayment?

Income-driven repayment plans recalculate your monthly student loan payments based on your annual income — that is, they base your charges on what you can afford to pay. This differs from a standard loan, in which your total principal and interest are divided evenly over a set period, without taking your earnings into account.

The US Department of Education actually offers four different income-driven repayment plans, each with different rules and benefits:

• Income-Based Repayment (IBR): For direct federal student loans, IBR caps your payment at 10% of your discretionary income and forgives your loans after 20 years of repayment.
• Income-Contingent Repayment (ICR): The only option that allows parent PLUS loans, ICR caps payments at 20% of discretionary income and forgives your balance after 25 years of repayment.
• Pay as You Earn (PAYE): For direct federal loans, PAYE caps payment at 10% of your discretionary income and forgives your loans after 20 years of repayment. This plan also limits capitalized interest — the amount of unpaid interest that gets added to your loan’s balance — to 10% of your balance, which helps keep your balance from ballooning over time.
• Revised Pay as You Earn (REPAYE): For direct federal loans, REPAYE caps your payment at 10% of discretionary income and forgives undergraduate loans after 20 years and graduate loans after 25 years. REPAYE also subsidizes 50 to 100% of any unpaid interest etc month to keep it from being added to your loan balance.

Pros and Cons of Income-Driven Repayment

If you’re struggling to keep up with student loan payments, income-driven repayment can lower your monthly costs and keep you current on payments, which will keep you from defaulting on the loan. This is important for keeping your credit score up and remaining eligible to borrow money or open credit cards in the future.

The other major advantage of an income-driven repayment plan is that any money you still owe after 20 or 25 years will be forgiven. For people with very large student loans, this could mean saving thousands of dollars.

The downside to income-driven repayment is that it takes a long time to have your debt forgiven. In the meantime, it may be harder to qualify for a mortgage or other loan if you owe a lot of money. This is because lenders want to make sure that you can afford to pay back all of your debts, so they do take student loan balances into account.

Reduced income-driven monthly payments could also lead to you owing more money in the long run, as unpaid interest is added to your loan’s balance — and then accrues more interest of its own. The longer you take to pay the more interest you will be charged over the life of the loan.

Though everyone with a qualifying federal loan is eligible for REPAYE, other plans have stricter eligibility requirements. For all plans, you will need to certify your income every year, and your payments could change if your income rises — which in turn may require you to reassess your household budget.

How to Decide on a Repayment Plan

Because each plan has different requirements and benefits, the federal government offers an income-driven repayment calculator. This loan simulator is available when you log into your student aid.gov account and will help you understand how each plan will work based on your existing loans.

If you haven’t yet borrowed any money, you can also use the tool to estimate repayments based on a variety of hypothetical situations. This is a great way to plan ahead to have a clear idea of what you can afford to borrow for college or graduate school.

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