How to Get Student Loan Forgiveness Through Income-Driven Repayment (IDR)

1. Income-driven repayment (IDR)

If you have federal student loans, they allow you to switch over to a program known as income-driven repayment. It works like this: instead of paying standard principal and interest like a regular loan, you pay a percentage (often around 10%) of your monthly discretionary income (discretionary income means anything you’re not spending on basic necessities like housing or food). You make these payments for about 20-25 years, after which the remainder of the balance is forgiven.

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Different repayment plans

There are 5 different types of income-driven repayment plans. Here are the basic details:

When does it make sense?

If you’re struggling to make the regular payments on your loans, this could be worth it. Also, if you’re not earning anything at all, it’s definitely worth it as your payments are 0.

Let’s do a calculation

Meet Jackie. Jackie earns $60k per year and owes about $100k in student loans, at a 5% APR. Her monthly payment is around $1k/mo, and she’s struggling to keep up with this crazy amount given her rent isn’t cheap either.

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If she did an IDR repayment plan, she would cut her monthly payment in more than half (from around $1k/mo, to $300-$500/mo). She’d be paying the loan off for a longer period of time (25 years vs 10), but she would pay around the same total amount across the entire loan.

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You may be asking yourself, why wouldn’t anyone do this? Well, if let’s say your total loan balance was $40k, not only would your monthly payment be around the same under an IDR as with a regular student loan plan, and you would actually pay more in total after the 25 years with the IDR. The IDR really only makes sense if you have more debt than your income, or if you really can’t make your payments.

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Do I have to be eligible?

For the best plans, you need to have a large debt load compared to your income. You can qualify for other IDR plans, but it might not be worth it relative to a regular repayment plan.

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Other things to note

1. It sounds awesome to have your student loans forgiven after a certain period of time, but remember that depending on your state, the forgiveness may qualify as income. And income can be taxed.

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2. Another thing - you will need to re-certify/notify the government every year of your income so that they don’t drop you from the program.

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3. Finally, any loans that have previously been in default are not eligible for IDRs.

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For more information on different IDR plans and how to sign up for one, head to the federal student aid website.

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2. Refinance your debt

The second option, besides going on an IDR plan, is to refinance your debt for either a lower monthly payment or a lower interest rate (or both).

The way this works is you would take out a new loan with a private lender, pay off the old loan, and continue paying off the new one at better terms.

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Who can I refinance with?

There are lots of private student loan lenders/marketplaces that offer competitive rates, such as:

• Earnest
• Commonbond
• Sallie Mae
• Sofi
• Splash

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Let’s do the math

Let’s go back to Jackie, who makes $60k and has $100k in student loans at 5%, paying $1k a month on a standard student loan repayment plan.

With 2023 interest rates, she will have a tough time finding something with a lower rate than her current one. However, she can refinance for a longer term (20 years) in order to bring down her monthly payment. This often comes with a much higher interest rate, and so she will be paying more over the life of the loan. In Jackie’s case, it makes way more sense to do an IDR.

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When does it make sense to refinance?

Meet Bob. Bob makes $60k a year but only owes $40k in student loans, at 5% APR. It doesn’t make sense for him to do an IDR, and his monthly payments are somewhat manageable. Bob just wants to save money. If rates come down, he should definitely take a look at refinancing the loan for a lower APR. Here’s a good place to check what today’s rates are for refinancing.

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3. Spend less

Over the last few years, we have all increased our spending, not only due to inflation but because the government paused student loan payments. Most folks ended up not continuing to pay, but instead filled that budget hole with more spending. Now that the government wants us to pay up, it’s time to cut back on the spending we did during the good times.

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What are your biggest spending items?

Besides rent, which might be hard to change in the immediate term (though we would suggest looking into cheaper rent as well), what are the biggest categories of spend for you? It’s likely you will need to free up anywhere from $200-$800 per month to pay down your loans - where will that money come from? Here are 60 ways to save money quickly. Also, if you want to be more conscious about your spending, sign up for the Debbie app and get our free money psychology course.

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Should it come from my savings?

A big question is - should I reduce my monthly savings to pay my debt, or even use the savings I’ve accumulated. The answer is yes, but only if you cannot cut back in other areas. Saving and investing is your path to financial freedom, so first exhaust all other options before digging into your savings.

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