5 Surprising Facts About Income-Driven Repayment

Learn More About Income-Driven Repayment Plans

By: Reyna Gobel

I’ve written about student loans and payment plans for 14 years. Yet, sometimes I get confused when I hear rumors about student loans. So I spend half my career combing through government and organization websites, contacting the Department of Education, and talking to other experts. My goal is clearing up rumors and reporting the details.

Here are the surprising facts I’ve found about income-driven federal student loan repayment plans (IDR):

IDR Plan Student Loan Forgiveness May Incur Taxes

Depending on the type of income-driven repayment plan you have, you may get the remaining balance forgiven after 20 to 25 years of payments. The amount of forgiveness could be a lot of cash, especially if you were making income-based payments that don’t cover interest for a number of years. If so, be prepared for a potentially heavy tax bill and an IRS payment plan. You’re still likely saving money because taxes are a percentage of what’s forgiven versus actually paying the full amount.  But it’s one more reason to build a healthy savings account as soon as you can.

The good news is rules may change before forgiveness happens. Then, taxes won’t occur.

Public Service Loan Forgiveness (PSLF) is Not Taxed

PSLF is a program where after 10 years of on-time payments while working for a public service employer, the remaining balance is forgiven. You’ll choose among income-driven repayment plans. Nothing is taxed. This program was designed to help doctors, etc. that otherwise may decide not to go to medical due to a seemingly crushing pile of student loan debt.

Consolidating Can Start Your Income-Driven Repayment Time Clock Over

Consolidating older FFEL federal student loans or multiple Direct Loans together has advantages. For older FFEL loans, the advantage is an expanded eligibility for income-drive plans available. Public service employees then have the possibility of PSLF. All federal consolidation loans gain an advantage of one payment versus paying each federal student loan individually. The problem arises if you were on an income-driven repayment plan. The time clock towards forgiveness starts over because it’s considered a new loan. Discuss with your servicer your current and potential forgiveness time lengths before consolidating.

A $0 payment Counts Towards Forgiveness

if your income justifies it, or a special program such as pandemic forbearance, a $0 monthly payment counts towards the months needed towards forgiveness. This is why if you’re unemployed an income-driven repayment plan is often better than asking for a break from payments.

IDR Plans Aren’t Always the Best Choice

Sometimes if you have a high income or will in the near future, you may not want an income-driven repayment plan. You may score lower payments with a different repayment plan. The reason is income-driven repayment plans max out payments based on the 10 year standard repayment plan. Extended payment plans give you up to 30 years to pay off the loan  with even payments, no matter how much your income rises. However, you won’t qualify for PSLF or IDR forgiveness after 20 to 25 years of payments.

Bottom Line

IDR payments are a great option when the 10 year plan is too pricey or you work for a public service employer. They may not be a great option if you want a payment that won’t rise with income. Talk to your servicer, use the calculators on studentloans.gov to compare repayment plan options. Don’t worry if you fee you chose wrong. You can always change plans next year.