It’s hard to argue against making student loan payments more affordable.

Millions of people who struggle to pay their loans have found relief by signing up for student loan repayment plans that allow them to reduce their monthly bill based on a percentage of their income.

The program is now getting new scrutiny after a Government Accountability Office report found that the cost of the program was more than double the amount the Department of Education had budgeted. As a result, taxpayers are now on the hook to forgive at least $108 billion in student loans, the GAO estimates.

Many borrowers are also paying more than they expected. The appeal of these plans is that they cap your monthly payment to 10 percent of your income. If you haven't paid the loan off after 20 to 25 years (depending on when you took it out and the kind of loan you have) the remaining balance is canceled.

But there's a downside. Even though you reduce the amount that you pay, interest continues to accrue on the balance. That means you could end up owing more than if you were on the standard 10-year student loan repayment plan. And if the loan is forgiven, you'll owe income taxes on that balance.

There are exceptions. If you’re in a public service loan forgiveness program and make 10 years of qualifying payments, you won’t owe taxes. And if you’re insolvent at the end of a 20- or 25-year forgiveness period, the tax bill may be waived.



Choose Carefully

If you’re in a student loan repayment plan like this now or think you’ll need one, here’s what you should know to ensure it doesn't cost you more than you expected.

There are five income-driven student loan repayment plans. The one you choose can have a big impact on how much you end up paying in total. If you can qualify (you have to prove financial need), the optimal plans for lowering your monthly payment are the Pay As Your Earn (PAYE) and Revise Pay As You Earn (REPAYE) plans.

Most recent borrowers who demonstrate financial need can use PAYE. This plan limits your payments to 10 percent of your discretionary income, caps your payments, and has a 20-year forgiveness period. The REPAYE plan is even more generous because it's available to all direct federal loan borrowers regardless of when they took out their loans. You don’t have to prove financial hardship. It also reduces payments to 10 percent of your discretionary income, and there's no cap on payments. As your income rises, so do your payments.

Not all loans are eligible. Income-based student loan repayment plans are available only to people who borrowed directly from the federal government. Before 2010, private banks made loans that were guaranteed by the federal government—Federal Family Education Loans. Those borrowers can qualify for income-based repayment, but they can access the other income-driven plans only if they consolidate their loans. If you have a Parent PLUS loan, you can do income-contingent repayment, which caps your payments at 20 percent of income. But there’s no limit to how much your monthly payments can grow. Private loans aren’t covered, though you can ask your lender whether you can work something out.

There’s lots of paperwork. Qualification depends on your income, and you have to be certified every year. Fill out a student loan repayment plan request with the DOE's Office of Federal Student Aid and submit it to your loan servicer. He or she will review the paperwork and let you know whether you qualify. Once you are enrolled in a student loan repayment plan, you need to submit new paperwork to your servicer every year to show your expected income.

You must make steady payments. You have to make regular payments for the loan to be eligible for forgiveness. They don’t have to be consecutive, but if you stop paying—say for a deferment for grad school or a forbearance—you’ll need to resume the number of payments until they equal 20 (240 payments) or 25 years (300 payments).

Don't Leave Payments on Autopilot

If you are struggling to pay your loans, getting into an income-based program is the smart thing to do, says Persis Yu, director of the National Consumer Law Center's Student Loan Borrower Assistance Project. But once you get back on track, don’t leave your payments on autopilot. There’s no penalty for prepaying, so step up your payments as your income grows.

Use the DOE’s repayment estimator to see what you’ll owe over time based on the student loan repayment plan you choose. Also check our interactive tool, which shows you how different payments options affect the amount you owe.

And last, stay on top of your paperwork. To take advantage of the forgiveness option, you’ll need documentation to show that you’ve made all of your qualifying payments. If you work in public service (teaching, or working at a nonprofit or for the government, for example) and are seeking debt cancellation through the public service loan forgiveness program, you need to file forms with your servicer showing you work for an eligible employer. We recommend doing it once per year.

Don’t depend on your student loan servicer to be on top of things. The DOE and the Consumer Financial Protection Bureau have been cracking down on servicing problems, an issue that Consumers Union, the policy and mobilization arm of Consumer Reports, has been trying to resolve, too.

Consumer Reports and other student loan advocates are also pushing to simplify the programs by creating one universal income-driven repayment plan.

“Now that the various plans are better known to the public, people are finally using these in higher numbers, and in the short term, this can be a good thing because it will prevent borrowers from falling behind on payments,” says Suzanne Martindale, staff attorney at Consumer Reports who specializes in student debt issues. “But this is a Band-Aid solution. Policymakers have created an expensive and complex loan system that fails to address the larger goal of reducing the cost of education so that all students have greater opportunities to contribute to our society and economy."

Income-based plans aren't likely to go away. The Obama administration has been pushing to expand the program. And in October, president-elect Donald Trump proposed a similar plan, capping monthly payments at 12.5 percent of the borrower’s income instead of 10 percent, and forgiving balances left after 15 years of payments instead of 20 to 25 years.

Income-based repayment plans "are an incredibly valuable resource for people who are having difficulty paying,” says Yu.