With five different iterations and very similar names, it’s no surprise that student loan borrowers are often confused by the suite of income-driven repayment plans available to them.
Yet the one you choose can have a significant impact on the total amount you end up paying.
Consumer advocates, including The Institute for College Access & Success, have been pushing for a more streamlined menu of repayment options for years. And the idea is one that politicians on both sides of the aisle (including presidential candidates Hillary Clinton and Donald Trump) have trumpeted. But while the future may bring simpler repayment options, for now, borrowers need to study up before choosing an income-driven plan.
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Here’s a guide to help you determine which income-driven plan you should give preference to:
If you can qualify for it, Pay as You Earn (PAYE) should be your first choice. The plan limits your monthly payments to 10% of your discretionary income, caps your payments so they can’t grow beyond a certain amount, and has a 20-year forgiveness period. To qualify, borrowers need to have taken out their first loan after Sept. 30, 2007 and at least one loan after Sept. 30, 2011. You also need to demonstrate a “partial financial hardship,” which is based on your income, family size, and the national poverty line.
The next best plan will be either Revised Pay as You Earn (REPAYE) or Income-Based Repayment (IBR). REPAYE, which sets your monthly payments at 10% of your discretionary income, is open to any Direct Loan borrower, regardless of whether you have a financial hardship.
But there downsides to REPAYE. For one, there is no cap on payments, so if you start in a low-paying position, but your salary rises dramatically over the next two decades, you’ll pay more each month and possibly in total under REPAYE than you would in other plans. REPAYE also offers a 20-year forgiveness period for undergraduate borrowers, but borrowers with any graduate school debt have to pay for 25 years before getting forgiveness.
Doctors, who earn low salaries during internships and residencies before seeing a significant income boost, are a good example of the type of borrower who should choose PAYE or IBR.
Under REPAYE, for example, a borrower with $170,000 in debt who takes home $100,000 a year might have payments that reach $2,428, whereas the highest monthly bill under PAYE or IBR would be $1,875.
There’s also a penalty for married borrowers on REPAYE. In other income-driven plans, married couples who file separate tax returns can keep their payments tied to just one spouse’s income. Under REPAYE, though, even if you do your taxes as married filing separately, both spouses’ incomes will be counted in the formula to determine your monthly bill.
“If you earn a low income but marry a wealthy spouse, then your payment is going to go up,” says Mark Kantrowitz, a student loan expert and author of several books on financial aid.
Making matters even more confusing, there are actually two different plans called Income-Based Repayment. The newer plan—open to borrowers with debt dating back no earlier than July 1, 2014—is more generous than the original. It sets payments at 10% of discretionary income and offers forgiveness after 20 years. The older IBR sets payments at 15% of discretionary income and offers forgiveness at 25 years. Still, the original IBR may make sense for you if your spouse earns a lot or you expect your income to rise dramatically while you’re in the repayment plan.
Lastly, there’s Income-Contingent Repayment. This is the oldest of the income-driven plans, started in 1994. Under ICR, your payments will be set at 20% of your discretionary income, but like REPAYE, there is no limit to how much the monthly payments can increase. ICR is most often recommended for Parent PLUS borrowers, since it’s the only income-driven plan open to them.