Everything You Need To Know About Income-Driven Student Loan Payments

If you have federal student loans, you are eligible for a variety of plans that can help you reduce your monthly student loan payments.

Depending on when you borrowed and what type of loans you have, you qualify for payments that are 10 to 20 percent of your disposable income, no matter how much your existing payment might be.

Many of the 43 million people who hold student loans do not realize how many options they have to modify payments to meet their financial situation.

This is clear, as 13 percent of federal student loan holders are in default, and many millions more are behind on payments. The fact is, since income-driven payments can be as low as $0, you should be up to date on your federal student loans, which will help keep your credit score in a good place.

Is Income-Driven Repayment Right for You?

Determine if the program makes sense for you.

Your monthly payment under an income-driven repayment plan is calculated by taking your annual income minus “top line expenses,” and minus a poverty line rate determined by the federal standard and the size of your household, including your spouse and any dependent children living with you.

Your payment is then capped at 10 to 20 percent of that amount. Gradible offers a free student loan evaluation that calculates your resulting monthly payment.

Verify your income.

If you file tax returns, the IRS provides a tool for you to look up your stated income from the past year. If you haven’t filed taxes, or your income has changed dramatically since your last tax return, you can file “proof of income” with your servicer to attempt to prove your income is low enough to receive these benefits.

Qualifying proof of income includes several months of pay stubs or bank statements.

Contact your student loan servicer.

Your servicer is assigned to you by the government, and can help walk you through your options and select the repayment plan that makes the most sense for you.

Your servicer also has ways for you to file the needed paperwork to get on an income-driven repayment plan directly through their sites, in case you don’t like talking on the phone.

You will not be able to modify your payment plan without talking to a servicer, so this is your first step if you want to lower your monthly student loans payments.

Apply for the program.

Finally, you’ll need to fill out the necessary paperwork to apply for your selected income-driven repayment. Here is a link to the government form to apply for income-driven repayment.

Income-Driven Repayment Plans and Eligibility Requirements

There are three main income-driven repayment plans that have varying payment levels, with eligibility largely being a function of when you took your loans out and their type.

Income-Contingent Repayment

This plan caps your payment at the lower of your graduate 12-year repayment plan, or 20 percent of your monthly disposable income, and is the lowest payment available to holders of PLUS loans and borrowers before 2007.

Income-Based Repayment

This plans caps your payment at 15 percent of your monthly disposable income, and is the lowest payment available to loan holders that borrowed after 2007 but before October 2011.

Pay-As-You-Earn

This plan caps your payment at 10 percent of your monthly disposable income and is the lowest of all income-driven repayment plans. It is available for holders of Direct Loans who took out the loans after October 2011.

A final important note: You must reapply for all income-driven repayment plans every year with proof of the income you received the prior year.

If you fail to recertify, your payment will revert to your standard 10-year payment, and you could end up paying more than you can afford, especially if you are on a direct deposit payment arrangement.