Income-Based Repayment of Student Loans

Finding a decent solution to paying off student loan debt is becoming almost as difficult for college graduates as finding a decent job.

If you can’t afford the federal Standard Repayment Plan, the Income-Based Repayment (IBR) plan may be right for you. Student loan borrowers are automatically enrolled in the 10-year standard plan to repay federal loans (not private ones), which pays their loans off in fixed monthly payments.

If you just graduated and aren’t earning a lot, or if you graduated a while back but are struggling to pay your loans, the Income-Based Repayment Plan, one of four income-driven student loan debt relief programs offered by the federal government, may be a good option. Borrowers who qualify for the IBR plan generally owe more on student loans than what they earn in annual income.

Income-driven repayment plans for federal student loans have been adjusted in recent years to accommodate the growing student loan debt crisis. In 2010, total student loan debt was $833 billion. By the end of 2024, it was $1.777 trillion, with 42.7 million Americans owing money on student loans. The average amount owed in 2010 was $25,250; in 2024 it was $38,375. It’s no wonder that one-quarter of Americans between the age of 25 and 39 with student loan debt say they’re either finding it hard to get by financially, or just getting by financially.

What Is Income-Based Repayment (IBR)?

There always have been options available to indebted students struggling to repay their loans, including loan consolidation, forbearance, deferment and loan forgiveness. The IBR plan bases payment on income, and gives borrowers 20 years to pay if they took out their first student loan after July 1, 2014, and 25 years if it was before that date.

Payments are based on 10% of discretionary income (If first borrowed after July 1, 2014) or 15% (If first borrowed before that date). Discretionary income is based on what’s left after deducting 150% of the U.S. Department of Health and Human Services poverty guideline for your family size.

To qualify, you must be able to demonstrate financial hardship. The balance is forgiven if your account is in good standing after the pay-off period. The forgiven portion will be considered income and be taxed, unless it was discharged between Dec. 31, 2020, and Jan. 1, 2026. If it’s discharged during that period, under the American Rescue Plan Act, no taxes will be charged.

You must recertify your income and family size each year, even if they don’t change, to remain eligible. Your payment will be recalculated by your loan servicer based on any changes. If your income increases enough that your payment is equal to or above the Standard Repayment Plan amount, you can stay in the program and won’t pay more than what the SR payment would be. The point of staying in the program is that once the 20 or 25-year pay period is over, your balance is forgiven. If you experience an income decline, your payment will be adjusted lower without you having to re-enroll.

If you don’t recertify every year, unpaid interest will be added to your balance, increasing the total cost of your loans over time. You’ll remain on the plan, but your monthly payment will no longer be based on your income. Instead, it will be the amount you would pay under a Standard Repayment Plan with a 10-year repayment period, based on the loan amount you owed when you initially entered the income-driven repayment plan.

Unlike other IDR plans, in summer 2025, borrowers will be able to used the Income-Based Repayment plan for loans that are in default.

Difference Between IBR Plan and Standard Repayment Plan

When it’s time to pay back your student loans, you’re automatically enrolled in the Standard Payment Plan, unless you sign up for the Income-Based Repayment Plan or one of the other four income-driven plans – Pay As You Earn (PAYE), Saving On A valuable Education (SAVE), or Income-Contingent Repayment (ICR).

The difference between the Standard Repayment Plan and the Income-Based Repayment plan is substantial. For example, if you start out with a salary of $25,000 and have the average student loan debt of $38,375, at the Direct Subsidized Loan interest rate of 6.53%, under the Standard Repayment Plan your monthly payment would be $436 for 10 years.

Compare that to paying just $58 a month under the Income-Based Repayment plan.

Not everyone qualifies for IBR, though. You must be able to demonstrate hardship, providing documented financial information when you fill out the application.

Advantages of Income-Driven Repayment Plans

The most obvious advantage of IDRs is that, because your payments are based on your income, you won’t get overwhelmed if you come out of college earning $25,000 a year, or even if you’re a few years out and you find that you simply don’t earn enough to make payments.

If you expect your salary to remain low, or for your family size to grow over the next 20 years, Income-Based Repayment would be a good program for you.

Other advantages of Income-Based Repayment for student loan debt:

• No matter how much your income increases, you will never pay more than what you’d pay with the 10-year Standard Repayment Plan.
• Payments are based on your current income and are re-evaluated every year, so if you are unemployed or have a loss of income, your payments should go down.
• Payments are capped at 10% of discretionary income if you received loan money after July 1, 2014, and 15% if you received loan money before then.
• You are eligible for loan forgiveness after 20 or 25 years, depending on when you borrowed the money. (The forgiven balance is considered taxable income in most cases).
• The plan is available to undergraduate and graduate students.
• You have the flexibility to change plans if you want to pay off the loan faster.

Disadvantages of Income-Based Repayment

The biggest disadvantage to Income-Based Repayment is that if you have an extremely low income for several years, your monthly loan payments may not be enough to cover the interest due, and you’ll have negative amortization. In that case, the balance on your loan actually goes up.

Why should that matter if you will have it all forgiven after 20 or 25 years? Because IRS rules are that you must pay taxes on the amount forgiven, in most cases. Congress can change those rules, but attempts to do that haven’t been successful.

Other disadvantages of Income-Based Repayment for student loan debt:

• The amount of interest paid over 20 years will mean you pay higher total than if you had opted for Standard Repayment Plan
• Payments are recalculated every year, so if your income increases, your payment will rise with it.
• The program doesn’t apply to private loans.
• You must demonstrate financial hardship to qualify.

Income-Based Repayment Plan Eligibility

All Direct Consolidated Loans made under either the Direct Loan program or the discontinued Federal Family Education Loan (FFEL) Program are eligible for IBR.

Uninsured private loans, Parent PLUS loans, loans that are in default, consolidation loans that repaid Parent PLUS loans, and Perkins Loans (another discontinued program) are not eligible.

To qualify for IBR, a borrower must demonstrate a “partial financial hardship.” A formula using adjusted gross income (AGI), family size and state of residence will determine how much a borrower can pay. If that amount is less than the monthly amount required under the standard 10-year repayment plan, the borrower is eligible for IBR.

You will not have a monthly payment if your AGI is less than 150% of the federal government’s established poverty guideline. It was $15,650 for a household of one in 2025, which means that if you earned $23,475 before taxes and deductions, you wouldn’t have to pay, because you’d have no discretionary income. (The poverty guideline rises if there are additional household members).

If you don’t make enough to qualify, the IBR operates as an economic hardship deferment. After three years, if you still don’t qualify, it operates as forbearance, which means you’ll have to pay accrued interest once you can make payments.

If a monthly IBR payment doesn’t cover the loan’s interest, the federal government pays the unpaid accrued interest on a subsidized Stafford loan for up to three years from the time an IBR plan is implemented. Since Stafford loans haven’t been issued since 2010, this doesn’t apply to most borrowers.

If a borrower works in a government position or for most nonprofits, and makes 120 on-time payments under an IBR plan, the balance of their loan may be forgiven.

Chart for Income-Based Repayment Plan

The following chart shows IBR monthly payment amounts on a direct subsidized loan for the 2024 average of $38,375 at 6% interest. This is for loans borrowed after July 1, 2014, with payments determined by 10% of discretionary income. IBR borrowers with loans from before that period would pay on 15% of discretionary income, so the payments would be higher. Borrowers with student loan payments below these amounts would not qualify for IBR.

DNQ – Does Not Qualify

Source: U.S. Department of Education