Public Service Loan Forgiveness: Do You Qualify and Is It Right For You?

Ben Luthi                                                                                                                                                                                                                                     Updated on February 19, 2020 

Editorial Note: This content is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the financial institution.

If you feel like your monthly student loan payments are too high, there’s a solution. The Department of Education offers income-driven repayment (IDR) plans to borrowers who qualify, and they can lower your payments to as little as 10% of your discretionary income.

But with four income-driven repayment plans available, choosing one can be a little overwhelming and confusing. We’re here to break it down for you so you can decide which student loan income driven repayment plan is best for you.

Your income-driven repayment plan options

1. Income-Based Repayment (IBR)
2. Pay As You Earn (PAYE)
3. Revised Pay As You Earn (REPAYE)
4. Income-Contingent Repayment (ICR)

Choosing an IDR plan and applying

1. Income-Based Repayment (IBR)

Income-Based Repayment (IBR) is an option regardless of when you received your loans. It’s similar to Pay As You Earn (PAYE) but offers more flexibility.

To qualify for IBR, your prospective payments must be lower than they’d be on the Standard Repayment Plan. You also must demonstrate financial need based on your income.

For example, if your student loan debt is higher than your annual discretionary income or is a significant portion of your annual income, you should qualify.

Eligible loans:

  • Direct loans (both subsidized and unsubsidized)

  • Direct PLUS loans made to graduate or professional students (loans made to parents are ineligible)

  • Direct consolidation loans that didn’t repay PLUS loans made to parents

  • Federal Stafford loans (both subsidized and unsubsidized)

  • Federal Family Education Loan (FFEL) PLUS loans made to graduate or professional students (loans made to parents are ineligible)

  • FFEL consolidation loans that didn’t repay PLUS loans made to parents

Eligible loans if consolidated:

  • Federal Perkins loans (which are no longer available to new borrowers)

Payment amount: Generally, 10% or 15% of your discretionary income, depending on the date of the first loan. Your discretionary income is calculated as the difference between your adjusted gross income and 150% of the federal poverty guideline for your family size and state.

Use our income-based repayment calculator to estimate your monthly payment.

The 10% amount is for new borrowers who didn’t borrow from the Direct Loan or FFEL programs until July 1, 2014, or later. The 15% amount is for everyone who began borrowing before that date.

Repayment period: 20 to 25 years. It’s a 20-year term for new borrowers on or after July 1, 2014, and 25 years for everyone else.

Pros:

  • It lowers your monthly payments.

  • Your loans are eligible for forgiveness if you carry a balance after the repayment period is complete.

Cons:

 

2. Pay As You Earn (PAYE)

Pay As You Earn (PAYE) is one of the newest income driven repayment plans to help borrowers manage their student loans. Unveiled in 2012, it’s similar to IBR but has stricter requirements.

To qualify for PAYE, you must demonstrate financial need. You must also be a fairly recent borrower. Specifically, you must be a new borrower as of Oct. 1, 2007, and have received a disbursement of a Direct Loan on or after Oct. 1, 2011.

To take advantage of PAYE, your prospective payments must be smaller than they’d be on the Standard Repayment Plan.

Eligible loans:

  • Direct loans (both subsidized and unsubsidized)

  • Direct PLUS loans made to graduate or professional students (loans made to parents are ineligible)

  • Direct consolidation loans that didn’t repay PLUS loans made to parents

Eligible loans if consolidated:

  • Federal Stafford loans (both subsidized and unsubsidized)

  • FFEL PLUS loans made to graduate or professional students (loans made to parents are ineligible)

  • FFEL consolidation loans that didn’t repay PLUS loans made to parents

  • Federal Perkins loans

Payment amount: Generally, 10% of your discretionary income, which is the difference between your annual income and 150% of the federal poverty guideline for your family size and state.

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Use our PAYE calculator to estimate your monthly payment.

Repayment period: 20 years.

Pros:

  • It offers the lowest payment amount for all eligible borrowers.

  • The loans are eligible for loan forgiveness after 20 years.

Cons:

  • You must be a new borrower to qualify.

  • Forgiven loans might be considered taxable income.

3. Revised Pay As You Earn (REPAYE)

Revised Pay As You Earn (REPAYE), which became available in December 2015, is the newest income-driven repayment plan.

This plan is similar to PAYE, with a few key differences. The most notable difference is the fact that you’re eligible regardless of when you took out your first federal student loan. You also don’t have to demonstrate financial need.

Eligible loans:

  • Direct loans (both subsidized and unsubsidized)

  • Direct PLUS loans made to graduate or professional students (loans made to parents are ineligible)

  • Direct consolidation loans that didn’t repay PLUS loans made to parents

Eligible loans if consolidated:

  • Federal Stafford loans (both subsidized and unsubsidized)

  • FFEL PLUS loans made to graduate or professional students (loans made to parents are ineligible)

  • FFEL consolidation loans that didn’t repay PLUS loans made to parents

  • Federal Perkins loans

Payment amount: Generally, 10% of your discretionary income, which is the difference between your annual income and 150% of the federal poverty guideline for your family size and state.

Use our REPAYE calculator to estimate your monthly payment.

Repayment period: 20 or 25 years. It’s a 20-year term if all your loans under the plan were for undergraduate study. It’s a 25-year term if any of your loans were for graduate or professional study.

Pros:

  • It offers the lowest payment amount for all eligible borrowers.

  • Undergraduate loans are eligible for loan forgiveness after 20 years.

Cons:

  • Borrowers with graduate and professional student loans must make payments for 25 years before qualifying for forgiveness.

  • Your spouse’s income is included in the monthly payment calculation, regardless of tax filing status.

  • Forgiven loans might be considered taxable income.

4. Income-Contingent Repayment (ICR)

Income-Contingent Repayment (ICR), like REPAYE, doesn’t have an income eligibility requirement. It’s also the only income-driven repayment plan under which Parent PLUS loans qualify after you consolidate them into a Direct Loan.

So, if you don’t qualify for the other plans but want a lower payment, Income-Contingent Repayment is the best repayment plan for student loans for you.

Eligible loans:

  • Direct loans (both subsidized and unsubsidized)

  • Direct PLUS loans made to graduate or professional students

  • Direct consolidation loans

Eligible loans if consolidated:

  • Direct PLUS loans made to parents

  • Federal Stafford loans (both subsidized and unsubsidized)

  • FFEL PLUS loans

  • FFEL consolidation loans

  • Federal Perkins loans

Under ICR, your monthly payment is based on your income and family size and might even be higher than it would be on the Standard Repayment Plan.

Check out our ICR repayment estimator to calculate your monthly payments. It’ll help you determine whether ICR is a better option than the Standard Repayment Plan.

Payment amount: The lesser of the following options:

  • 20% of your discretionary income, which is the difference between your annual income and 150% of the federal poverty guideline for your family size and state

  • The payment amount on a 12-year fixed repayment plan, adjusted for income

Repayment period: 25 years.

Pros:

  • It’s easier to qualify since there’s not an income eligibility requirement.

  • You might be eligible for loan forgiveness once you complete your repayment plan.

  • Parents with Parent PLUS loans can qualify once they consolidate their loans into a Direct Loan.

Cons:

  • It has the highest potential payment amount of all income-driven plans.

  • Your payment might not be lower than it would be on the Standard Repayment plan.

  • Forgiven loans could be considered taxable income.

Choosing an IDR plan and applying

Choosing an income-driven repayment plan can help you manage your payments. But which one is the best student loan repayment plan for you?

For starters, determine whether you qualify based on your income and family size. You can do so by calculating your household income and comparing it with the federal poverty guideline.

If you do qualify, estimate your payments using our online calculator. Then, consider how much more you might pay in interest compared with the Standard Repayment Plan.

With a lower monthly payment and a longer repayment period, you’ll likely pay a lot more in interest over time. So, if you can afford it, it makes sense to go with the Standard Repayment Plan.

Applying for income driven repayment plans

Submit the income-driven repayment plan request form online at StudentLoans.gov, or fill out a paper form, which you can get from your loan servicer.

Remember: For IBR and PAYE, you must demonstrate financial need to be eligible. You can verify your adjusted gross income with your federal tax return or with the IRS Data Retrieval Tool, which adds your tax information to your application.

If you haven’t filed a tax return or have no income to report, you can provide alternative documentation, such as pay stubs or unemployment benefits.

Choose your IDR plan wisely

Income-driven repayment plans can be a great way to reduce your federal student loan payments. But it’s important to look at the long-term benefits and consequences.

On one hand, IDR plans can help you in the present. But in the future, you could deal with taxable income on forgiven loans and might pay more in interest over time. Be clear about your goals and choose the right repayment plan for you.

 

Rebecca Safier and Melanie Lockert contributed to this article.