Income-Based Payment Plans: How to Qualify for Reduced Payments

In this post, we’re going to break down everything you need to know about income-based payment plans—what they are, how they work, and how you can qualify for one.

Is a college degree really an investment? Yes. However, for it to become an investment, you need to be very careful about managing the costs that come with it. Tuition, fees, books, housing—it all adds up fast. And if you’re not careful, student debt can pile up before you even graduate.

Here’s a quick data showing just how serious the cost of college can be:

• Average annual tuition increase: 3.63% (2010–2023)
• Public 4-year college tuition: Up 36.7% from 2010 to 2023
• Since 1963 (adjusted for inflation), tuition has increased by 197.4%

Additionally:

• In-state tuition averages $9,750; out-of-state is about $28,386.
• Private nonprofit students pay around $38,421 for tuition.
• Factoring in loans and lost income, a bachelor’s degree can cost over $500,000.

Let’s be real—no one wants to borrow money. But if you’re in college, taking out loans is pretty common—unless you happened to be born into a ton of money.

And that’s exactly why income-based payment plans are such a big deal. They give students—especially those who aren’t rolling in cash—a more realistic, manageable way to pay for school without getting buried in debt.

Related Articles:

• University Payment Plans for Low-Income Students
• Do Payment Plans Affect Financial Aid? What You Need to Know
• Federal Loans vs. Payment Plans: Which Should You Use First?
• Private Loans vs. University Payment Plans: What’s More Cost-Effective?

What Is an Income-Based Payment Plan?

The Income-Based Repayment (IBR) plan lowers your monthly federal student loan payments based on how much money you actually have left after covering basic expenses (that’s called your discretionary income). These plans are designed to keep your loan payments manageable based on your income and family size, not your loan balance.

Here are the four main types of income-driven repayment plans you can apply for:

Plan	Monthly Payment	Repayment Term	Eligible Loans	Best For
Pay As You Earn (PAYE)	10% of discretionary income	20 years	Direct Loans, FFEL & Perkins (if consolidated)	If your income is low and not expected to rise much
Income-Based Repayment (IBR)	10% or 15% of discretionary income (based on when your loan was first disbursed)	20 or 25 years	Direct Loans, FFEL Loans, Perkins (if consolidated)	If you have older loans and don’t want to consolidate
Income-Contingent Repayment (ICR)	Either the lesser of 20% of discretionary income, or your payment on a 12-year fixed plan (based on your income)	25 years	Direct Loans, Parent PLUS Loans (if consolidated), FFEL, Perkins (if consolidated)	If you have Parent PLUS loans
SAVE Plan (new)	10% of your discretionary income (with some payments as low as $0)	10 to 25 years (based on loan balance)	Most Direct Loans, except those used to pay off Parent PLUS loans	Most Direct Loan borrowers, especially low-income earners

Here’s how it works:

• If you got your first federal loan on or after July 1, 2014, your payments are capped at 10% of your discretionary income. Anything left after 20 years gets forgiven.
• If your loan is from before July 1, 2014, your payments will be 15% of your discretionary income, and any leftover balance will be forgiven after 25 years.

You’ll need to recertify your income every year to stay on the plan and keep your payment amount accurate.

The good news? Through the 2025 tax year, any student loan debt that gets forgiven under an income-driven plan won’t be taxed by the federal government. But be aware—some states might still charge income tax on the forgiven amount.

Plus, with the launch of the SAVE Plan (Saving on a Valuable Education), college payment plans based on income became even more affordable. Thanks to a new formula for calculating discretionary income, millions of borrowers now qualify for very low—or even $0—monthly payments.

How These Plans Help Low-Income Students

There’s no doubt that reduced tuition payments for low-income students are helpful—they really make a big difference. But how helpful are they exactly?

Here are a few ways these plans can be a game-changer for students who are financially stretched:

Smaller monthly payments

If you’re barely making ends meet, the last thing you need is a huge tuition bill on top of everything else. With an income-based plan, your monthly payments are usually much lower than they would be under a traditional payment plan. This makes it more manageable for you to pay off your tuition without putting yourself in serious financial strain.

Longer payment terms

Another advantage is that these plans often come with longer repayment terms. This means you don’t have to pay off everything in a short period. Instead, the payments are stretched out over a longer time, which can reduce the monthly financial pressure. This is ideal for students who might have low-paying jobs or part-time work while in school.

Better budgeting options

Since your payments are based on what you can afford, you can budget your finances better. You won’t have to worry about making a payment you simply can’t cover. Additionally, many schools allow you to adjust your payment schedule if your income changes—say, you get a higher-paying job or experience a sudden financial hardship.

Focus on education, not debt

When you’re not constantly worried about how to make your loan payments, it’s easier to stay focused on your studies. Lower payments can reduce financial anxiety, allowing you to concentrate on completing your degree. This is especially helpful for first-generation students or students from families with limited financial resources.

Who Can Qualify for Income-Based Plans?

Now, let’s talk about how to qualify for income-based college plans.

Each school may have its own set of criteria, but here are the most common things schools look at when deciding if you qualify:

1. Income Level: Your household income is one of the biggest factors. If you (and your parents, if you’re a dependent student) don’t make much money, you’re more likely to qualify for a reduced payment plan.
2. Family Size: The more people you support (like siblings or parents), the more likely you are to qualify for reduced payments. If you come from a larger household, your ability to pay for tuition might be stretched thinner because more people depend on the same pool of money.
3. Enrollment Status: Some income-based payment plans are only available to students who are enrolled at least half-time (generally six credits per semester). If you’re a part-time student, you may still qualify but not get the same deal as full-time students. So, be sure to check your school’s policy on enrollment status.
4. Current Financial Need: In some cases, schools might also consider your financial need as part of the eligibility process. If you’ve already received a FAFSA award or other financial aid payment options that show a significant need, you might be more likely to qualify for an income-based payment option.

Ultimately, to qualify for IBR, you must show a “partial financial hardship.” It’s based on your adjusted gross income or AGI, family size, and state. If your required payment is lower than the standard 10-year plan, you’re eligible for IBR.

No Payment If You Earn Below 150% of the Federal Poverty Line

• For 2025, if you’re single and make $23,475 or less (150% of the poverty line), you won’t have a monthly payment since you’d have no discretionary income.
• The poverty line increases with family size.

How to Apply for an Income-Based Plan

Here’s a straightforward guide on how to apply for income-driven tuition programs:

Step 1: Gather important materials.

To apply online, just log into your studentaid.gov account with your FSA ID. Whether you’re applying online or on paper, you’ll need to provide some basic info:

• Personal Info: Address, email, and phone number
• Financial Info: Family size, latest tax return or transcript (you can use the IDR Data Retrieval Tool to link this directly), and spouse’s income (if you filed jointly)

If you haven’t filed taxes or your income has changed, you’ll need to submit proof of income from the past 90 days, like:

• Pay stubs
• A letter from your employer with your gross pay
• A signed statement explaining your income if you don’t have formal docs

If you’re unemployed and getting unemployment benefits, you’ll need to show proof of that, too. No income? You can self-certify on the application.

After filling out your application, you’ll see the repayment plans for which you qualify. Pick one, double-check everything is correct, and sign.

Step-by-step guidance on how to apply through a college or university’s financial office or website.

Step 2: Submit paper IBR applications.

To submit on paper, download the IBR application PDF from your loan servicer. You can either:

• Fill it out by hand or on your computer
• Include your income docs like a tax return, pay stub, or bank statement

Once done, log into your servicer’s website to upload your application and documents. If you printed it out, you can also mail or fax it. Your servicer will let you know once they’ve processed everything.

Normally, IBR applications take about 4 weeks to process. After that, you’ll get a new bill, and your payments will start again.

Step 3: Recertify every year.

Applying for income-based repayment isn’t a one-time thing. You’ll need to recertify every year. If you don’t, your payments could go back to the standard plan, and you might face a higher monthly bill.

Your servicer will notify you when it’s time to recertify. You’ll fill out the same info again (either online or on paper) to keep your payments in check.

What Documents Will You Need?

As mentioned above, applying for flexible college payment plans typically requires a few important documents. Here’s a quick rundown of what you’ll need:

• Proof of income: This could be pay stubs, tax return documents, or a letter from your employer confirming your income.
• FAFSA confirmation: If you’re receiving financial aid, your FAFSA confirmation can help prove your need for financial assistance.
• Household size: You may be asked to provide details about your household, including the number of people living in your home and their relationship to you.

Tips for Managing Tuition With a Limited Budget

Even with affordable college payment options, managing college costs can still be tough. Here are a few extra tips to help you manage tuition and other expenses on a tight budget:

• Scholarships and Grants: These are often free money that you don’t have to pay back. You can search online scholarship databases, check with your college’s scholarship office, or even ask local organizations if they offer financial assistance for students.
• Work-Study Programs: These student tuition assistance programs allow you to earn while studying. The pay you earn can go toward your tuition, helping to offset costs without adding to your debt.
• Budgeting Tools: Being mindful of where your money goes can help you save and make sure you’re staying on top of your financial situation.
• Textbook Rentals and Secondhand Books: Textbooks can be expensive, so look for used books or rentals instead of buying new ones. Many schools have online systems where you can rent textbooks for a lot less.

Frequently Asked Questions About Income-Based Plans

1. Does interest add up on income-based plans?

Yes, interest may still accrue on your balance, but the rate could be lower depending on your plan. It’s important to ask your school about the specifics of how interest works.

2. Do these plans affect my enrollment status?

No, as long as you remain in good standing with the plan and meet any other enrollment requirements, your academic enrollment shouldn’t be affected.

3. How often do I need to reapply?

You might need to reapply for a low-income student payment support plan every year or whenever there’s a significant change in your financial situation. Always check with your