For borrowers with federal student loans, income-driven repayment (IDR) plans can provide significant relief. If you’re eligible, you can enroll in an IDR plan and get a significantly lower monthly payment that is based on your discretionary income.
As your income changes, so does your student loan monthly payment under an IDR plan. If you have been financially impacted by the COVID-19 pandemic, you may be worried about how your payments will be affected once the federal administrative forbearance ends on May 1, 2022. Before student loan repayment restarts, take some steps now to learn about the best way to repay your student loans to ensure you can afford your payments.
What Are Income-Driven Repayment (IDR) Plans?
IDR plans are available to federal Direct loan borrowers. There are four different repayment plans:
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
Depending on the plan you qualify for, your repayment term will be extended from 10 years to 20 or 25 years. Your monthly payment will be limited to a percentage of your discretionary income.
How Are Payments Calculated Under IDR Plans?
IDR plans are based on your discretionary income. For the purposes of IDR plans, your discretionary income is calculated based on the federal poverty level for your family size.
For example, your discretionary income for IBR would be the difference between your income and 150% of the federal poverty level. For 2021, the poverty guideline for a single person without dependents in the contiguous U.S. is $12,880, and 150% of the poverty level would be $19,320.
If you earned $30,000 per year, that means your discretionary income would be $10,680 ($30,000 – $19,320=$10,680). Under IBR, your payments are 10% of your discretionary income. You’d pay $1,068 per year or $89 per month under IBR.
How Emergency Student Loan Relief Has Affected IDR Plans
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, federal student loan payments have been suspended since March 13, 2020.
Since that time, borrowers on any payment plan — including IDR plans — haven’t had to make their payments, and with interest rates set at 0%, no interest has accrued.
There was an added benefit to those pursuing loan forgiveness. During the federal payment freeze, the months without payments still counted toward the required amount for both Public Service Loan Forgiveness (PSLF) and IDR discharge.
- PSLF: With PSLF, your loans are forgiven after working for a qualifying non-profit employer for 10 years and making 120 monthly payments. Since March 13, 2020, the months count toward the required 120 payments, even if you didn’t pay anything.
- IDR: Depending on the plan you’re on, your remaining loan balance is forgiven if you haven’t paid them off after 20 or 25 years. Even though payments will have been suspended for over two years, that entire period counts toward the loan forgiveness requirement.
However, this perk only works if you’re still employed full-time. If you lost your job or dropped to part-time status, you don’t get to take advantage of this benefit.
IDR Plan Options After Administrative Student Loan Forbearance Ends
Since payments are suspended until May 1, you have a little extra time to come up with a plan for your loans so you don’t miss student loan payments. Depending on your situation, you can use one of the following tactics to manage your debt:
1. Apply for Income-Driven Repayment if You Need To
If your current payments are too expensive, you can apply for an IDR plan or switch to a different plan. The process is easy; you can apply for income-driven repayment plans online. You can use the Federal Loan Simulator tool to see how much you’d pay under each IDR plan.
2. Stay on the Same Repayment Plan
When payments resume, your loan servicer will default to your current repayment plan. If you’re on an IDR plan, you’ll stay on it. You can remain on this plan — and keep the current payments — until it’s time to recertify your loan.
Staying on the same plan until you have to recertify makes sense for borrowers that are still employed or have gotten promotions or raises. You can stay on the lower payment until you have to recertify your income. At that point, your payments will likely increase.
3. Recertify Your Income
If you’re on an IDR plan, your payments will restart in May based on your previous information. However, you may need to recertify your income if your circumstances have changed.
When you’re on an IDR plan, you need to undergo income-driven repayment recertification, a process where you resubmit your income and your payments are updated to reflect the new information. Your IDR recertification date is one year after you start or renew an IDR plan.
With the latest extension of the CARES Act’s student loan relief measures, the earliest you’ll have to worry about IDR recertification is in August 2022.
However, if your income has dropped or if your family size has grown, you can recertify your income ahead of schedule to potentially lower your payment. Some people will even qualify for a $0 payment, meaning you don’t have to pay anything, yet your loans will be current and the $0 payments count toward loan forgiveness.
4. Switch to a Different Repayment Plan
You may be interested in another repayment plan if you don’t qualify for an IDR plan. Depending on your loans and income, you could take advantage of the following repayment options:
- Extended Repayment: The extended repayment plan changes your term to 25 years, giving you a lower payment.
- Graduated Repayment: Under this plan, your payments start low and increase every two years. The repayment term is 10 years.
Keep in mind that neither the extended nor graduated plans offer student loan forgiveness. Use the Federal Student Aid website’s Loan Simulator to determine which plan is right for you.
5. Apply for Student Loan Forbearance or Deferment
If you cannot afford your payments due to a significant financial hardship, such as a long-lasting illness or unemployment, you may be eligible for federal forbearance or deferments. If you qualify, your loan servicer will allow you to temporarily postpone your payments. Depending on the program, you could postpone your payments for up to 12 months at a time.
The eligibility requirements are tough to meet, and interest will likely accrue during the payment pause, so only explore this option as a last resort. If it sounds like the right fit for you, contact your loan servicer.
6. Refinance Federal Student Loans
If you have federal loans with higher interest rates, you may want to consider student loan refinancing. You could qualify for a lower rate, or extend your loan term to get a smaller monthly payment.
Just keep in mind that refinancing federal student loans means you’ll lose access to federal loan benefits, including any more extensions on the administrative forbearance or loan forgiveness.
Learn More: Income-Driven Repayment vs. Student Loan Refinancing
7. Refinance Private Student Loans
If you’re like most borrowers, you have multiple student loans. Besides federal loans, you may have private loans issued by banks or credit unions. Private student loans often have higher interest rates than federal ones, so it can make sense to refinance your debt to get a lower payment and a lower interest rate. Refinancing your private student loans can even help you save thousands over the life of your loans.
Refinance Your Student Loans With ELFI
If you’re thinking about refinancing your student loans, check out ELFI.* We offer low-interest rates and multiple loan terms, and you can choose between fixed and variable interest rates. You can use student loan refinancing to tackle your high-interest private loans, streamline your repayment, or even lower your monthly payments.
Use the student loan refinancing calculator to find out how much you can save by refinancing your debt.
