IDR Plans and High Earners: What You Need to Know

• If SAVE goes away, fallback plans like IBR and PAYE may be available, but payments could be significantly higher for high earners.

• Loan forgiveness isn’t tax-free. A forgiven balance could add tens of thousands to your tax bill—start planning now.

• Lowering your AGI by maximizing retirement contributions can shrink IDR payments and save you money long-term.

Managing federal student loans as a high earner isn’t easy. Even with a $200k+ income, the system can feel unfair, leaving you questioning your repayment choices and long-term costs.

You might be wondering:

• Will my income disqualify me from PFH?

• Should I throw everything I can at my loans or focus on investing and building wealth?

• What if I make the wrong decision, and it sets me back for years?

And now, with the SAVE plan under legal challenges, uncertainty grows for high earners. It’s not just payments but penalties that feel harsher as you earn more, making the system seem stacked against you.

You’re not alone in feeling this way. Let’s break down the complexities of IDR plans so you can take control of your repayment strategy and move forward with confidence.

Related: How Income-Driven Repayment Plan Works

If your goal is to aggressively pay off your loans, and that’s what you’re leaning toward, you might want to go for it. But the real question is: How much flexibility do you need in your student loan payments?

Aggressive repayment gives you the fastest path to being debt-free, while an IDR plan offers more breathing room to balance other financial goals.

Ultimately, it’s about what works best for your financial situation.

Go With Aggressive Repayment If…

• You want to eliminate debt quickly: Paying off your loans faster reduces the weight of debt and gives you financial freedom sooner.

• You want to pay less overall: Larger payments mean less interest accrues over time, saving you money.

• You have stable income: If you can comfortably make higher payments without sacrificing other priorities like savings or an emergency fund, this option may give you peace of mind.

Stick With an IDR Plan If…

• You value flexibility: Lower monthly payments let you free up cash for savings, investing, or handling unexpected expenses.

• You’re pursuing forgiveness: If you expect to carry a remaining loan balance after 20 or 25 years, IDR plans could help, though a potential tax bill on forgiveness should be part of your planning.

• Your income isn’t predictable: IDR plans adjust with your earnings, making them a safety net for those in fluctuating or commission-based roles.

How to Decide

Reflect on these points to choose the path that suits you best:

1. Assess your cash flow: Are you in a position to make higher payments, or do you need flexibility to manage other financial goals?

2. Think about long-term goals: Are you aiming to buy a house, build investments, or save for retirement? An IDR plan can free up cash for those priorities.

3. Weigh your comfort with debt: If being in debt feels overwhelming, aggressive repayment might be the better choice for your peace of mind.

A common worry for student loan borrowers is what happens if their income increases after signing up for an income-driven repayment plan like PAYE or ICR. The good news? You won’t be kicked off your plan just because you’re earning more.

Here’s how it works:

Your Payments Adjust, But You Stay on the Plan

When your income grows, your student loan payments will increase during the next income recertification period. That’s because IDR plans recalculate payments based on your current income and family size.

Your payments may rise, but you’ll still benefit from these key protections:

• Payment Caps: For plans like PAYE and IBR, your payments are capped at what you’d pay under the 10-year standard repayment plan, no matter how high your income goes.

• Student Loan Forgiveness: You’ll continue working toward forgiveness after 20 or 25 years of qualifying payments, even if your income increases.

Think of it as a safety net: IDR plans adjust to your financial situation, whether you’re earning $70k or $200k. Even if you outgrow the initial eligibility requirement, you’ll remain on the plan.

Related: Income Limit for Income Driven Repayment Plan

What About Partial Financial Hardship?

Partial Financial Hardship is an initial requirement for plans like PAYE and IBR. It’s calculated based on whether your required IDR payment is lower than what you’d pay under the 10-year standard plan.

But here’s the key, you only need PFH to qualify for the plan initially.

Once enrolled in PAYE or IBR, you can stay on the plan even if you no longer meet the PFH criteria. Your payments will simply adjust upward to reflect your income.

What Happens if Your Income Fluctuates?

One of the biggest strengths of IDR plans is flexibility.

If your income drops in the future, your payments will decrease accordingly after you recertify.

This makes IDR plans a great option for borrowers in industries with variable earnings, such as commission-based work, freelancing, or careers in higher education.

Here’s an Example to Demonstrate

Let’s say you’re earning $90k when you enroll in PAYE, and your initial monthly payment is $450. Over a few years, your salary climbs to $140k. When you recertify, your payment might increase to around $1,000. But here’s the reassuring part:

• You’ll still benefit from the payment cap.

• You’ll stay on track for student loan forgiveness after 20 years of qualifying payments.

Now, imagine your income drops back to $110k during a future recertification period. Your payments will adjust back down, ensuring they remain manageable.

We don’t know what the SAVE Plan litigation means for anyone yet. But the stakes, are higher for high earners. You face the greatest risk of harm because your payments could become much higher—and more punitive—if less affordable repayment plans like PAYE, IBR, or especially ICR become your only options.

If SAVE goes away, will Revised Pay As You Earn plan return?

It’s uncertain, but that seems unlikely.

Instead, we may be left with IBR, PAYE, and ICR—each with unique limitations that could impact high earners more severely:

• PAYE: Limits payments to 10% of discretionary income but requires Partial Financial Hardship to qualify, which many high earners may no longer meet.

• IBR: Requires 15% of discretionary income for older borrowers and also demands PFH, making it less forgiving.

• ICR: The least affordable plan, calculating payments at 20% of discretionary income, often making it unaffordable for borrowers with significant debt.

If SAVE is struck down, borrowers may face fewer options for managing student loan debt, and those options may not align with their financial goals. Plans like PAYE, IBR, and ICR are far less forgiving, especially for high earners who may no longer qualify for Partial Financial Hardship.

With the federal government under pressure to reduce costs, it’s uncertain if or when a replacement for SAVE would emerge.

In the meantime, high earners should focus on securing the lowest monthly payment possible by exploring strategies like maximizing retirement contributions or adjusting their financial priorities to stay ahead of potential changes.

Related:

• SAVE Plan Blocked

• Should I Switch From SAVE to IBR? It Depends

If you’re looking to shrink your monthly IDR payments, the secret lies in lowering your Adjusted Gross Income (AGI). Since IDR plans base payments on your AGI, reducing that number can directly cut your payment amount while also helping you manage your broader financial goals.

Here are some of the best strategies to reduce your AGI while staying on track:

1. Max Out Your Retirement Contributions

Contributing to a retirement account like a 401(k) or Traditional IRA lowers your taxable income and, in turn, your AGI. For 2024, you can contribute up to $23,000 if you’re under 50 or $30,500 if you’re over 50 to your 401(k).

Why it works:

• Pre-tax contributions reduce the income IDR plans use to calculate payments.

• You’re not just lowering payments now; you’re also securing your financial future.

Example: Let’s say you earn $150,000 and contribute $23,000 to your 401(k). That lowers your AGI to $127,000, which could significantly reduce your monthly IDR payment.

2. Open and Fund a Health Savings Account (HSA)

If you’re enrolled in a high-deductible health plan, an HSA is a powerful tool. Contributions are pre-tax, the funds grow tax-free, and withdrawals for medical expenses are also tax-free.

Why it works:

• You lower your AGI and create a tax-free fund for healthcare expenses.

• For 2024, you can contribute up to $4,150 as an individual or $8,300 for a family.

Example: By contributing the family maximum of $8,300, you could lower your AGI enough to make a noticeable dent in your IDR payment.

3. Consider Filing Taxes Separately

For married borrowers, filing taxes separately may prevent your spouse’s income from being factored into your AGI for IDR purposes.

Why it works:

• Keeps your repayment calculation based solely on your income.

• Best for couples where one spouse earns significantly less or has no loans.

Example: If your combined income with your spouse is $300,000, filing separately might bring your AGI down to just your individual income of $150,000, lowering your IDR payment substantially.

Related: Tax Implications of Settling Student Loan Debt

4. Use Other Deductions and Credits

Explore other eligible deductions like student loan interest (up to $2,500) or mortgage interest.

Tax credits, while they don’t lower AGI directly, can still help free up cash flow that you can redirect to other financial goals.

Weighing the Trade-Offs

Lowering your AGI has clear benefits for reducing your IDR payment, but you also need to consider the long-term implications:

• Pro: Reduced monthly payments free up cash flow for investing or saving.

• Con: Lower payments may mean you’re extending your repayment period and paying more in interest over time.

If SAVE goes away, it’s not the end of the world. You’re going to have options. Those options might be more expensive because SAVE was the most affordable repayment plan ever.

That said, this isn’t uncharted territory. Borrowers used these repayment systems before SAVE existed, and there are ways to manage the shift.

Fallback Options

If SAVE disappears, borrowers will likely transition to older IDR plans like PAYE, IBR, or ICR. These plans are less generous, with stricter eligibility requirements or higher payment percentages. (See earlier for details.)

They still offer forgiveness benefits, but preparing for these changes now can help you avoid surprises.

Related:

• Income-Based Repayment Plan

• Income-Contingent Repayment Plan

Be Wary of Income Recertification

SAVE’s repeal could expedite recertification timelines. Be proactive:

• Check your current AGI and project how recertification could affect your payments, especially if your income has risen.

• Use IDR calculators to compare potential payments under alternative plans and adjust your financial plans accordingly.

Develop Backup Strategies

If SAVE is repealed:

• Prioritize maintaining qualifying payments if you’re close to forgiveness, even if it means switching plans temporarily.

• Consider federal loan refinancing if you have strong credit and stable income, but be aware this forfeits federal protections like IDR.

• Adjust your budget to minimize the impact of higher payments or reduced flexibility under older plans.

You can calculate the cost of each IDR plan by focusing on three key factors: monthly payments, interest accrual, and forgiveness (including its tax implications). Understanding these will help you compare options and make an informed decision.

Key Cost Factors

• Monthly Payments: Payments are a percentage of your discretionary income. For example, Saving on a Valuable Education plan uses 5%, while older plans like Income-Based Repayment and Income-Contingent Repayment range from 10-20%.

• Interest Accrual: Federal loans, including Direct Loans, have fixed interest rates, but unpaid interest can capitalize and increase your balance. Plans like SAVE reduce this burden with subsidies, unlike IBR or ICR.

• Forgiveness: After 20 or 25 years, any remaining loan balance may be forgiven. But, the forgiven amount is treated as taxable income under current law, so you may need to prepare for a “tax bomb” when filing your tax return.

Example Scenarios

For a borrower earning $160k with $295k in loans:

• SAVE: Payments around $850/month with higher total interest costs over 25 years. Forgiveness is likely, but the forgiven balance will be taxed.

• IBR or PAYE: Payments around $1,300/month with forgiveness after 20 years. Higher payments reduce total interest costs.

• Aggressive Repayment: No forgiveness but the lowest overall cost. Payments of around $3,000/month eliminate debt in 7-10 years, minimizing interest.

How to Plan for Total Costs

1. Estimate Your Payments: Use our IDR calculators or the loan simulator on the Federal Student Aid website to compare costs under SAVE, IBR, or ICR.

2. Plan for Tax Implications: If you’re pursuing forgiveness, estimate the tax burden and set aside funds yearly to cover it. Work with a tax advisor if needed.

3. Consider Eligibility: If you’re a new borrower, be mindful of eligibility rules for each plan. For example, certain plans may not apply to Parent PLUS Loans or consolidation loans without additional steps.

The 60-payment rule, which took effect July 1, 2024, limits borrowers from switching to IBR if they’ve made 60 or more payments under SAVE (formerly REPAYE), unless they meet the Partial Financial Hardship requirement.

For high earners pursuing PSLF, this raised concerns about being stuck with higher payments under SAVE.

Here’s what you need to know:

• Payments Before July 1, 2024, Don’t Count: Only payments made after this date apply to the 60-payment threshold.

• The Rule May Be Irrelevant If SAVE Ends: If the SAVE plan is struck down in court, the 60-payment rule would likely no longer apply, and borrowers could switch plans based on PFH eligibility alone.

• PAYE and ICR Are Back: With PAYE and ICR reopened until July 2027, borrowers have more flexibility to adapt their repayment strategies.

The 60-payment rule poses less of a barrier now, though monitoring repayment plan progress remains significant. If you’re unsure how this rule affects your strategy, book a call with our student loan experts to get clarity and plan your next steps.

Key Benefits of Non-IDR Plans

• Predictability: Fixed or structured payments make budgeting easier.

• No Forgiveness Tax Liability: Avoids the tax bomb tied to IDR forgiveness.

• Flexibility for Extra Payments: High earners can pay down the principal faster without IDR restrictions.

Non-IDR plans offer simpler paths to debt reduction for borrowers who value stable payments and want to avoid the long-term uncertainties of IDR. If one of these repayment plans appeals to you, these guides explain the process and application steps:

• How to Apply for the Graduated Repayment Plan

• How to Apply for the Extended Repayment Plan

• How the Standard Repayment Plan Works

For high-income earners on IDR plans, the “tax bomb” is a key concern. Forgiven loan balances after 20 or 25 years are taxed as income, potentially pushing borrowers into higher tax brackets.

For example: Earning $160,000 annually with $200,000 forgiven could increase taxable income to $360,000, resulting in a federal tax bill of $60,000 or more.

As a high earner, you’re already dealing with elevated tax obligations. This additional liability can feel especially overwhelming.

To prepare: Estimate your potential tax burden early using a tax calculator or by consulting a tax professional, and consider setting aside a portion of your discretionary income each year in a high-yield savings account for this purpose.

If the tax bomb feels unmanageable, repayment options like Graduated or Extended Fixed plans, which avoid forgiveness-related tax implications, may be worth exploring.

Income-driven repayment for high earners comes with a lot of moving pieces, from choosing the right plan to understanding how changes in income or tax implications could affect your long-term costs. If you’re feeling stuck, you’re not alone—this system wasn’t designed to be simple.

Check your loan balances, interest rates, and repayment plan. Focus on what matters most—flexibility, cost savings, or quick debt payoff. If forgiveness or tax implications feel overwhelming, don’t worry—sometimes, the best step is to talk with someone who truly understands the process.

Book a consultation with a student loan expert to address your concerns, run the numbers, and create a strategy that aligns with your goals and the life you’re building.

Related reading:

• Student Loan Repayment Options

• Pros and Cons of Income-Driven Repayment Plans

• What Repayment Plans Qualify for PSLF?

• How Do I Change My Student Loan Repayment Plan?

• How Spousal Income Affects Income-Driven Repayment Plans