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Income-Driven Repayment Plans – Pros & Cons of IDR for Student Loans

Some borrowers feel the pinch of monthly student loan payments, but they’re able to manage them. For other borrowers, their debt is so large and their income so low it may be a significant struggle to afford their monthly payments while still covering necessities like food and housing. For these borrowers, income-driven repayment (IDR) plans can be a lifesaver.

I know this struggle firsthand. When I graduated with my Ph.D., my monthly student loan payments were higher than my take-home pay as a teacher. There was simply no way I could have paid them on the standard 10-year repayment plan. So, I enrolled in an IDR plan, which tied my monthly payments to my income, making them much more manageable.

If you’re also struggling with making your student loan payments, an IDR plan may seem like an attractive way to get some relief. Typically, IDR lowers your monthly student loan payment. It can even result in forgiveness of a portion of your loans if you have any remaining balance after making the required number of payments.

However, while there are definite advantages for some borrowers, not everyone benefits from enrolling in an IDR plan. Before you decide to enroll, carefully weigh the pros and cons against your own debt and income levels.

Advantages of IDR

For student loan borrowers with high balances relative to their income or unmanageable monthly payments, IDR plans can offer some benefits.

1. Your Monthly Payment Could Be Lower

If you’re struggling to make your monthly payment, an IDR plan can help. If you have a low income relative to your loan balance, your monthly payment will be lower than what it would be on a standard 10-year repayment schedule. For many struggling borrowers, that could mean the difference between being able to manage their debt and facing default.

2. Monthly Payments Are Tied to Income & Family Size (Not Loan Amount & Repayment Term)

Payments become more manageable on an IDR plan because they’re tied to income and family size, not the amount owed. And if you lose your job, your hours are cut, or you welcome a new addition to your family, you can have your monthly payments recalculated. They can be as low as $0 if your income is barely above the poverty level for a family of your size or if you become unemployed.

3. Your Loan Balance Could Be Forgiven

If you owe a very high amount relative to your income, chances are you’ll have a balance remaining after 20 to 25 years of income-based repayments. In that case, you become eligible to have the remainder forgiven. If you make 120 payments while working full time for a qualifying nonprofit or government agency, you could have your loans forgiven in as little as 10 years through Public Service Loan Forgiveness (PSLF).

4. You Could Pay Back Less Overall

Borrowers who take on six figures or more of student loan debt but never achieve an income that allows for full repayment of that debt could end up paying back far less on an IDR plan than on the standard 10-year repayment schedule. In fact, they could even end up paying back less than they originally borrowed, depending on their situation.

To calculate how much of your student debt could be forgiven and what you’d have to pay on different IDR plans, try the Repayment Estimator at Federal Student Aid.

5. It Could Help You Avoid Default

If, like 20% of student borrowers, you’re behind on making your student loan payments and are in danger of defaulting, enrolling in an IDR plan can help. Defaulting comes with serious consequences, including significant damage to your credit score, which can make it difficult to buy a car or even rent an apartment. If you default, the federal government can automatically garnish your wages and capture all of your tax refunds without having to sue you first.

An IDR plan can help you avoid this by lowering your monthly payments to something more manageable. If you’re several months behind on your payments, servicers typically “catch you up” with a deferment or forbearance. That means you won’t need to make back payments; you’ll start with your new, lower monthly payment.

Even better, if you’re behind on payments because of unemployment, you may qualify for a $0 repayment, depending on spousal income if you have any. This allows your payments to count toward your 20 or 25-year forgiveness clock. If you opt for forbearance or deferment instead, with the exception of economic hardship deferment, your period of payment postponement won’t count toward your total number of payments required to qualify for forgiveness.

Disadvantages of IDR

Although IDR plans offer some unquestionable benefits for certain types of borrowers, they’re not for everyone. The average borrower with a total student loan debt balance of $33,000 or less isn’t likely to benefit from an IDR plan at all. Even for those borrowers who are struggling with their loans, there could be some drawbacks to enrolling in an IDR plan.

1. Your Income Might Be Too High to Qualify

The main advantage of IDR plans is the ability to tie payments to your income and family size rather than to the amount owed and the repayment term. But you may be struggling to make your monthly payments and still have an income too high to qualify.

Your monthly payment on an IDR plan is generally calculated as 10% of your “discretionary” income, although it can be as high as 20% on some plans. On all plans except for the income-contingent plan (ICR), your discretionary income is the difference between your adjusted gross income (AGI) — the amount of your income that is taxable every year — and 150% of the poverty level for a family of your size.

If that math results in a monthly payment higher than you would be required to pay on a standard 10-year repayment plan, you won’t qualify for the Pay As You Earn Plan (PAYE) or the Income-Based Repayment Plan (IBR).

If this is the case for you, there’s no point in applying for an IDR plan, as none of them will benefit you. Generally speaking, your debt balance needs to be higher than your annual income for an IDR plan to be useful. If it isn’t, you’re better off looking elsewhere for help managing your monthly payments, such as the graduated repayment plan, extended repayment plan, student loan refinancing, or consolidation.

2. You’ll Stay in Debt Far Longer

Although enrolling in an IDR plan may reduce your monthly payment, it does so at the expense of your loan term. All of the IDR plans extend the length of required payments from the standard 10 years to 20 or 25 years. So while the lower monthly payment may be highly attractive, keep in mind the potential long-term consequences of being in debt for decades longer. Will making those monthly payments keep you from being able to do other things with your money, like buy a house, start a family, or save for retirement?

A 2015 NerdWallet survey found that not saving for retirement in order to make student loan payments could result in nearly $700,000 in lost retirement savings. Even worse, with the average IDR plan extending the repayment term anywhere from 20 to 25 years, you could easily still be paying on your own student debt when it’s time for your children to enroll in college.

Rather than enrolling in IDR, consider joining the 21% of student loan borrowers who take on second jobs to repay their student loans, or explore any of the other options for paying off your student loans as quickly as possible.

3. You Could Pay Back More Overall

Although you may be paying far less per month on an IDR plan than you would on a standard 10-year repayment plan, you’ll be paying interest on your overall balance for far longer.Over the long term, you’re likely to pay back more overall than you would have on a 10-year repayment schedule. That’s true even if you qualify for forgiveness of any remaining balance unless your debt is extremely high and your income extremely low.

To figure out how much you’d have to repay in total on any of the federal repayment plans, visit the Repayment Estimator at Federal Student Aid.

4. Your Monthly Payments Could End Up Being Higher

Each IDR plan adjusts your monthly payments according to your income. That means as your income increases, so will your monthly payments. Although PAYE and IBR cap income adjustments so you’ll never pay more than what you would have on a 10-year repayment schedule, REPAYE and ICR do not have similar caps. So if your income increases significantly enough, you could end up paying more per month with REPAYE and ICR than you would have on a 10-year repayment schedule.

Also, if your income increases so much that you want to exit your IDR plan and return to repayment on a standard schedule, you may end up needing to make higher payments than you would have if you’d never used an IDR plan. That’s because any interest that accrued during your time in IDR will be capitalized. The total accumulated interest will be added to your principal, and new interest will start accruing on the new, higher balance.

5. Your Balance Could Grow

If your loan balance is high enough in relation to your income, your monthly payments could be less than the interest that accrues on your balance every month. That means your balance will grow even though you’re paying on it. It can be a frustrating and scary thing to witness.

In this case, you might need to bank on loan forgiveness. But if your income ever increases to the point where you no longer qualify for income-driven repayment — and, hence, loan forgiveness — all that interest could get capitalized with your principal balance, depending on the IDR program in which you were enrolled). You’ll have to pay back the entire new, higher balance, which could be as much as tens of thousands more. That means IDR could put you in a worse position than when you started, even if you’ve been making payments on your loans.

6. You Could End Up With a Hefty Tax Bill

Unless your loans are forgiven under the PSLF program, you may face a sizable tax bill at the end of your repayment period if you have a remaining balance that’s forgiven. The IRS treats the forgiven amount as if it were income and taxes it accordingly.

It can be a nasty surprise for many borrowers. While you may feel finally free, after 20 or more years, of the burden of your student debt, depending on how much is forgiven, you could end up owing thousands — or even tens of thousands — of dollars in income tax.

Worse yet, if you can’t afford to pay your tax bill and have to set up payment arrangements with the IRS, it could mean months or years of more monthly payments — this time to the IRS — just when you thought you were finally done.

Although laws regarding student loans could change in the decades it takes to pay back your loans, until they do, be prepared to pay income tax on your forgiven balance.

7. You May Never Benefit From Forgiveness

Unless you have a very high amount of debt relative to your income, you likely won’t even have a balance remaining to be forgiven at the end of making 240 to 300 payments. That means you won’t have to worry about paying income tax on any remaining balance that’s forgiven. But it also makes enrolling in IDR solely for the benefit of forgiveness rather pointless.

Even if you do end up with a balance remaining, you probably will have repaid what you borrowed several times over in those 20 to 25 years, and you’ll wind up having to pay even more in the form of taxes on the forgiven balance. So it’s highly questionable whether forgiveness itself is a benefit at all.

Again, to see what your monthly payments could be on any IDR plan, how much in total you’ll have repaid at the end of your term, whether you’ll have any balance remaining to be forgiven, and how much could be forgiven, visit the Repayment Estimator at Federal Student Aid.

8. Your Spouse’s Income May Affect Your Payment Amount

If you’re married filing jointly, your spouse’s student loans can be figured into the calculation of how big a monthly payment you should be able to afford. Unfortunately, so can your spouse’s income.

Say you’re currently unemployed and unable to make payments on your student loans. On your own, you can easily qualify for a $0 monthly payment. But if your spouse makes a large enough income that there’s a difference remaining after subtracting 150% of the federal poverty line for your family size from your household’s AGI, you’ll be stuck making payments even if the reduction in your household income makes it difficult to manage all your other bills and expenses. In this case, you may be better off opting for an economic hardship deferment.

If your spouse’s income will make a significant impact on your monthly payment, you may want to speak to your tax professional about whether it’s more beneficial for you to file separately.

9. Your Monthly Payments May Still Be Too High

Even after accounting for your income and family size relative to the federal poverty line, your monthly payments may still be too high for you to manage. The formula for discretionary income takes no other debt, with the potential exception of your spouse’s student loan debt, into account. You’ll never be asked what other bills you’re responsible for paying, including rent, mortgage payments, car loans, or credit card debt. Nor will any private student loans, if you have them, be factored into the calculation for what you “should” be able to afford. That means the amount you’re required to pay may still be out of your reach.

If this is where you find yourself, a graduated or extended repayment plan may work better for you.

Final Word

If you’re genuinely struggling to repay your student loans, an IDR plan might make sense for you.

But if you decide to opt for one, it’s important to understand the potential consequences.

If an IDR plan doesn’t seem right for you, but you’re unable to manage your current loan payments, contact your student loan servicer to discuss other options.

In the end, the right path for you depends on your personal situation. So be sure to research all your options — not only IDR — to see which repayment plan and schedule is most beneficial for your financial situation before making any changes to your student loan repayments.

Are you struggling to make your monthly student loan payments? Does IDR seem like it would be a workable solution for you?

Sarah Graves, Ph.D. is a freelance writer specializing in personal finance, parenting, education, and creative entrepreneurship. She's also a college instructor of English and humanities. When not busy writing or teaching her students the proper use of a semicolon, you can find her hanging out with her awesome husband and adorable son watching way too many superhero movies.