Don’t Call It Student Loan Forgiveness: Income-Driven Plans Rarely Clear Debt

The information in this article is based on an analysis of 2021 financial data in relation to the Revised Pay as You Go or REPAYE income-driven repayment plan. As of summer 2023, REPAYE has been replaced by the more favorable Saving on a Valuable Education or SAVE plan.

Income-driven repayment plans — a safety net within the federal student loan repayment system touted as a solution for federal borrowers struggling to pay back their loans — promises lower monthly payments and forgiveness after 20 or 25 years. But repayment projections calculated by NerdWallet show forgiveness is unlikely for most borrowers.

Among those who do eventually have debt forgiven, the resulting interest that accrues in the meantime is substantial, as much, if not more, than the amount forgiven, NerdWallet’s analysis shows.

And among borrowers who do receive some cancellation through income-driven repayment, higher income taxes also await.

Income-driven repayment is still the only tool for borrowers to make more affordable payments than on a standard, 10-year, plan. But over time, IDR is likely to cost borrowers more than they bargained for and is unlikely to result in the kind of debt relief that “forgiveness” promises.

Key findings

• Only borrowers with starting salaries of $20,000 and $30,000 (rising 3% annually) will ever see their debt forgiven on $27,000 in unsubsidized federal student loans after making payments, without stopping, for 20 years.

• Borrowers with starting salaries of $40,000 to $100,000 (also rising 3% annually) will pay off their $27,000 in unsubsidized federal student loans before they reach the 20-year mark that triggers loan forgiveness.

• Most borrowers with high debt, $129,500, are more likely to see loan forgiveness through income-driven repayment, but they’ll accrue exorbitant interest at the time of forgiveness — often as much, if not more, than the amount forgiven.

• Borrowers who do get their loans forgiven could face higher income taxes, even pushing them into higher federal tax brackets.

How income-driven repayment forgiveness works

When income-driven repayment works as intended, borrowers enroll in the plan and their payment amounts are set at a portion of their income. Borrowers with multiple loans must consolidate into one new loan prior to enrollment.

The borrower’s timeline to repayment resets and they begin making payments on a 20-year or a 25-year plan, depending on the type of loans they have: 20 years for undergraduate debt or 25 years for consolidated loans that include graduate debt. Their payment amounts are expected to increase over time as their pay increases. Then they’re supposed to get forgiveness at the end of their 20 or 25 years of payments.

For this analysis, NerdWallet considered payments, interest and forgiveness for borrowers enrolled in Revised Pay As You Earn, or REPAYE. It was launched in December 2015 and is the most accessible among the four income-driven repayment plans for federal student loans.

REPAYE caps payments at 10% of a borrower's discretionary income and lengthens their repayment term. Discretionary income is calculated as their annual income minus 150% of the poverty line (equaling $19,320 in 2021) divided by 12 months. Borrowers enrolled in REPAYE aren’t scheduled to start seeing their debt discharged until 2035 at the earliest.

Whether a borrower sees their remaining debt forgiven after the repayment period ends will depend entirely on how much they borrowed, their interest rate, what their income is and how quickly their income rises over time.

This analysis measures outcomes for:

• Two different debt loads, which are based on current federal direct loan maximums: $27,000 for undergraduates and $129,500 for those with graduate and undergraduate debt.

• Consolidated interest rates calculated to reflect the last few years of rates that a borrower plausibly could have.

• Nine potential starting salaries ranging from $20,000 to $100,000; we assume annual wages will rise 3% year over year during the payment term.

• The effect on taxable income at a federal level for those borrowers who do reach the threshold for forgiveness.

The analysis, for consistency, assesses only the effectiveness of the program’s forgiveness component if borrowers stay on track with payments and their income rises steadily. It doesn’t take into account many situations borrowers may face through the life of their loan that could shift their expected payoff or forgiveness timeline, including pauses, loss in income or other factors that affect IDR calculations, such as the addition of a spouse’s income.

Additional assumptions and information on calculations are included in the methodology below.

Few undergrad borrowers will see loans forgiven through IDR

Among those with $27,000 in undergraduate unsubsidized federal student loans, only borrowers with starting salaries of $20,000 or $30,000 would see their debt forgiven after 20 years of payments, the analysis shows.

*Interest is subsidized by the government when payments do not cover interest.

Other borrowers who start with salaries ranging from $40,000 to $100,000 will never see forgiveness through income-driven repayment because they will have paid off their balance plus interest long before it’s time for forgiveness.

Borrowers who start with a $40,000 salary could pay off their debt in 149 months (roughly 12 years and four months) once their salary hits just over $55,000. For other borrowers it happens much faster: Borrowers who start with salaries of $50,000 or more will pay off their loans using income-driven repayment faster than even the standard plan, which takes 120 months and could result in savings on interest.

The Department of Education is implementing income-driven repayment fixes

Many borrowers have benefitted from one-time fixes that counted past payments toward the 240 or 300 needed for income driven repayment forgiveness.

In 2023, federal student aid will also start displaying income-driven repayment payment counts on studentaid.gov when borrowers log into their accounts.

And the federal student aid office plans to allow more loan statuses, such as deferments and forbearances, to count toward income-driven repayment forgiveness moving forward.

The Education Department said it will notify waves of loan forgiveness recipients about every two months. Here is the timeline.

In July 2023, 804,000 longtime federal student loan borrowers received word that a total of $39 billion in loan forgiveness would be given under the account adjustment.

In October 2023, it was announced that 51,000 borrowers would get around $3 billion in loan forgiveness.

In December 2023, $2.2 billion was announced for nearly 46,000 borrowers through IDR account adjustments and $2.6 billion for more than 34,000 borrowers through PSLF.

Debt relief continues into 2024. All told, the IDR account adjustment has forgiven roughly $45.7 billion in loans among 930,500 borrowers, as of Jan. 19, 2024.

Account adjustments are expected to continue through June 2024.

Borrowers with high forgiveness amounts accrue more in interest and face high tax bills

Borrowers with high amounts of federal unsubsidized loan debts (those with undergraduate debt who also attend grad school for up to five years) are likely to see forgiveness after 25 years. But they’ll accrue a significant amount in interest that’s well above the total principal amount, and they’re more likely to be stuck with a high tax bill on the forgiven amount added to their taxable income.

Through the end of 2025, any amount forgiven through income-driven repayment is not considered taxable income. This projection assumes that rule will not be extended.

The forgiveness component of income-driven repayment technically works, but at a high cost to the borrower. For example, a borrower with $129,500 in federal debt who has a starting salary of $50,000 may get $162,708 in debt forgiven after 25 years, but they’ll have paid $133,996 on their loan, accrued $167,857 in interest and paid $48,652 in additional taxes.

Borrowers with high incomes will pay off high debt before forgiveness

High income borrowers with high debt are unlikely to see forgiveness and will still accrue high amounts of interest over time.

What this means for borrowers

Income-driven repayment is still a safety net that can help borrowers lower their monthly payments. It’s certainly a better option than forbearance or deferment because IDR keeps borrowers on track to repayment or forgiveness. But borrowers must take into account the amount of interest they could expect to grow over time and shouldn’t necessarily expect forgiveness through IDR.

Borrowers considering income-driven repayment should plug their loan information into Federal Student Aid’s Loan Simulator, which will give borrowers a picture of their monthly bills, overall costs and potential forgiveness under each plan.