How Is Income-Driven Repayment Calculated?

Income-Driven Repayment (IDR) plans offer a way for federal student loan borrowers to manage their monthly payments by basing the amount on their income and family size. These plans are designed to make loan repayment more affordable, especially for those with lower incomes relative to their debt. A significant benefit of IDR plans is the potential for loan forgiveness of any remaining balance after a specified period of payments.

Key Components of Income-Driven Repayment Calculation

Calculating an Income-Driven Repayment (IDR) payment involves several inputs, with Adjusted Gross Income (AGI) serving as the primary measure of a borrower’s financial capacity. AGI is derived from your federal income tax return. This figure represents your gross income minus certain deductions, providing a standardized measure of your income for various financial calculations, including student loan repayment.

Family size is another factor in determining your IDR payment. For IDR purposes, family size includes you, your spouse (if you file taxes jointly), and any children or other dependents who receive more than half of their support from you. The size of your family directly influences the federal poverty line threshold used in the calculation, which in turn impacts your discretionary income.

The Federal Poverty Line (FPL) is an income threshold used by the federal government to determine who is considered impoverished. For IDR calculations, the FPL is a benchmark that varies based on family size and the state of residence.

Discretionary income is the amount of your income that is considered available for student loan payments after accounting for basic living expenses. It is calculated by subtracting a specific percentage of the federal poverty line for your family size from your Adjusted Gross Income (AGI). While specific percentages vary by IDR plan, a common method involves subtracting 150% of the FPL from your AGI. For example, if your AGI is $40,000 and 150% of the FPL for your family size is $20,000, your discretionary income would be $20,000.

Calculating Your Payment Under Each IDR Plan

The Income-Based Repayment (IBR) plan calculates your monthly payment based on either 10% or 15% of your discretionary income. The specific percentage depends on when you received your first federal student loan. For borrowers who took out loans on or after July 1, 2014, the payment is 10% of discretionary income, while those who borrowed before that date pay 15%. Payments under IBR are capped at what your payment would be under the Standard Repayment Plan with a 10-year repayment period.

The Pay As You Earn (PAYE) plan sets your monthly payment at 10% of your discretionary income. Similar to IBR, the PAYE plan also includes a payment cap.

The Saving on a Valuable Education (SAVE) plan, which replaced the Revised Pay As You Earn (REPAYE) plan, bases your monthly payment on 5% of your discretionary income for undergraduate loans and 10% for graduate loans, or a weighted average if you have both types. A key difference with SAVE is how it determines discretionary income, using 225% of the federal poverty line instead of the 150% used by other IDR plans like IBR, PAYE, and ICR. This higher poverty line exclusion results in a lower calculated discretionary income, which often leads to a lower monthly payment for borrowers. The SAVE plan also includes an interest subsidy benefit, where if your calculated payment does not cover the monthly interest, the government covers the remaining interest, preventing your loan balance from growing due to unpaid interest.

The Income-Contingent Repayment (ICR) plan calculates your monthly payment as the lesser of two amounts. It’s either 20% of your discretionary income, or the amount you would pay on a fixed 12-year repayment plan, adjusted to your income. This plan is the only IDR option available for Parent PLUS loan borrowers, though only after the Parent PLUS loan has been consolidated into a Direct Consolidation Loan.

Factors Influencing Your IDR Payment Over Time

Borrowers enrolled in an Income-Driven Repayment (IDR) plan are required to recertify their income and family size annually. This annual process ensures that your monthly payment continues to accurately reflect your current financial situation. To complete recertification, you submit updated income documentation, such as your most recent federal tax return or pay stubs, along with confirmation of your current family size. Failing to complete this annual recertification can lead to a recalculation of your payment based on a standard repayment schedule, which could result in a significantly higher monthly amount, and any unpaid interest may be capitalized, increasing your principal balance.

Significant changes in your financial circumstances during the year can also influence your IDR payment. If your income decreases substantially or your family size increases, you can request a recalculation of your monthly payment outside of the annual recertification cycle. This allows for an immediate adjustment to a lower payment, providing relief during periods of financial hardship. Conversely, a substantial increase in income might lead to a higher payment if you choose to update your information before your scheduled annual recertification.

Your marital status and how you file your taxes can significantly impact the Adjusted Gross Income (AGI) used for your IDR calculation, which in turn affects your monthly payment. If you are married and file taxes jointly with your spouse, both your incomes are combined to determine the AGI used for the IDR calculation. If you are married and file separately, only your individual income is considered, which can result in a lower AGI and potentially a lower IDR payment, especially if your spouse has a higher income. However, filing separately may have other tax implications, such as limiting certain deductions or credits, so it is important to consider the overall financial impact.

While IDR plans aim to make monthly payments affordable, it is important to understand the long-term implications, including loan forgiveness and interest accumulation. After making payments for a specified period, typically 20 or 25 years, any remaining loan balance is forgiven. However, during the repayment period, interest can continue to accrue, potentially leading to a larger total balance over time, even with lower monthly payments. Some plans, like SAVE, offer an interest subsidy to prevent this balance growth due to unpaid interest, but for other plans, the principal balance can still increase if your payments do not cover the accruing interest.