Income-Based Repayment

Income-based repayment or income-driven repayment is a method under which US federal student loan borrowers pay a percentage of their discretionary income for up to 20 or 25 years, after which the rest of his or her loans are forgiven.

Income-driven repayment is an umbrella term for four specific repayment plans that are available in the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan Program. These four repayment plans are called Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR).

Payments under the IBR Plan are 10% or 15% of discretionary income, but will never be more than the 10-year standard repayment amount. Whether a borrower pays 10% or 15% of discretionary income depends on when the borrower first started borrowing student loans.

Payments under the PAYE Plan are 10% of discretionary income, but will never be more than the 10-year standard repayment amount.

Payments under the REPAYE Plan are also 10% of discretionary income; however, unlike IBR and PAYE, payments for high-income borrowers may be higher than the 10-year standard repayment amount. Also, unlike IBR and PAYE, if required monthly payments do not cover the accruing interest, 50% of the unpaid interest is forgiven, thereby reducing negative amortization.

Payments under the ICR Plan are the lesser of 20% of discretionary income or a 12-year standard repayment amount adjusted based on the borrower's income.

The primary benefit provided by income-driven repayment plans is the lowering of the borrower's monthly payment to be less than what it would be under other repayment plans.

In addition, because payments are generally based on income, instead of loan debt, it is not certain whether or when a borrower will repay the loan in full. Therefore, the income-driven repayment plans provide for forgiveness after 20 or 25 years of qualifying repayment, depending on when the student borrowed and the plan the borrower chooses.

The income-driven repayment plans are also qualifying repayment plans for the Public Service Loan Forgiveness Program, which provides for forgives of certain federal student loans after 10 years of qualifying employment and payments.

The last benefit is that the government will pay the borrower's interest on subsidized loans for the first three years under the IBR, PAYE, and REPAYE Plans, if the repayment amount does not cover it.

Since a borrower has a lower monthly payment to make, it will take longer to pay back the loans, therefore, more interest is paid. The borrower must file new documentation of earnings and family size every year.

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