What is An Income Based Repayment?
Income-Based Repayment (IBR) is the most widely available and widely used income-driven repayment program for borrowers of federal student loans. IBR helps keep monthly loan payments affordable according to each individual borrower’s monthly income using a sliding scale model.
Qualifying for IBR
Income-based repayment is based on your income level, rather than on what you owe. However, to qualify for IBR, you must have enough debt relative to your income to show the need for reduced monthly payments.
What Will Be My Payment Be With IBR?
With IBR, your monthly loan payment is based on what you currently earn. If your student loan was disbursed on or after July 1st, 2014, your monthly payment will not exceed 10% of your discretionary income. For loans disbursed prior to this date, your monthly payment will not exceed 15% of your discretionary income (your income minus 150% of the poverty level for your family size in your state).
150% of the Poverty Level in 2017
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Your monthly payment under an income-based repayment plan will never be higher than what you were paying under a 10-year standard repayment plan. In some cases, like if your income doesn’t reach the minimum required amount (150% of the poverty level), you may even find yourself with a $0 monthly bill. This is great for those who exit college with a huge loan balance and limited employment prospects.
Qualifying Loans for Income Based Repayment
Eligibility for Income Based Repayment depends on which loans you have taken out for your education, and when they were taken out. The following federal student loans from the Direct Loan and Federal Family Education Loan (FFEL) Programs are the ones that qualify for IBR (studentaid.gov):
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans made to graduate/professional students
- Direct Consolidation Loans that do not include PLUS loans made to parents
- FFEL PLUS Loans made to graduate/professional students
- FFEL Consolidation Loans that do not include PLUS loans made to parents
Ineligible loan types include Direct Plus Loans made to parents, FFEL Plus Loans made to parents, and any loans (including Direct Consolidation loans) made to parents or that include loans made to parents. Perkins Loans are not generally eligible but may be eligible if consolidated.
Benefits of Income-Based Repayment
The first and most obvious benefit of IBR is that your monthly student loan payments are calculated based on what you earn, rather than what you owe. But there are several other benefits of enrolling in an income-based repayment plan, as well, including interest forgiveness, forgiveness at the end of your loan term, and loan forgiveness for public service employees.
Another benefit of income-based repayment is interest forgiveness. If your new monthly payment under the IBR plan isn’t large enough to pay the accruing interest on the subsidized portion of your Direct Loan, the U.S. Department of Education will pay the interest on your loan up to three consecutive years. You can use our student loan interest forgiveness calculator to see how much in interest forgiveness you might receive.
Forgiveness At End Of Term
Another major benefit of IBR is loan forgiveness at the end of your repayment term. An IBR plan offers complete loan forgiveness after 20 years for borrowers who took their loans out after July 1st, 2014, or 25 years if the loans were taken before that date.
If you make your payments in full and on time and the loan is still not completely paid off after this period of time, any remaining loan amount will be forgiven and legally discharged.
Public Service Loan Forgiveness
The final benefit of IBR is student loan forgiveness for public service employees. If you make 120 payments, on time and in full, under an Income-Based Repayment program, while employed full-time with a qualifying public service organization, you may qualify to have the remaining balance forgiven in the public service loan forgiveness program. This could save up to another 15 years of payments.
Drawbacks of Income-Based Repayments
While an IBR plan can offer several benefits for many student loan borrowers, this type of plan isn’t right for everyone. There are multiple drawbacks to Income-Based Repayment, including payment recalculation and recertification, penalties for failing to pay interest on your loan, and unexpected tax bills.
Annual Recalculation and Recertification
With an Income-Based Repayment plan, your monthly payment is recalculated every year. Changes to your family size and income (including that of your spouse if filing taxes jointly) will alter your expected monthly payment.
The good news here is that if your income rises dramatically, you can change your repayment plan into a standard repayment at any time you choose. The bad news is that your monthly payment can increase significantly based on your income, throwing a wrench into any promotion or raise you may earn along the way.
The other negative here is that you have to recertify your income each and every year to avoid having your IBR plan canceled and reverted to a standard 10-year plan. Certifying your income every year can be a major hassle and not one that everyone will find worth the time.
Doubling Your Time In Debt
The major benefit of a 10-year standard repayment plan is that you know when you’ll be done paying off your student loans. But IBR plans focus on lowering your monthly payment amount, rather than paying off the loan within a certain timeframe, which means you could be paying off your student loans for 20 to 25 years. The smaller your monthly payments, the longer you can expect to be in debt.
Paying More Overall
With an IBR plan, your monthly payments are capped based on your income, which means the interest on your loan may not get paid off within those monthly payments. Because you stay in debt for a longer period of time under an IBR plan, your loan has more time to accrue interest. That means that in most cases, an IBR plan means paying a higher dollar amount overall, even if it is spread out between lower monthly payments.
Unexpected IRS Bills
Depending on your loan, the U.S. Department of Education will forgive your loan under your IBR plan after 20 or 25 years of on-time payments. If you still owe money on your student loan after 20-25 years, your loan will be forgiven.
However, that doesn’t always mean you’re off scot-free. Any balance that’s forgiven by the federal government is treated by the IRS as taxable income. This means that if you still have a significant amount left on your loans when they’re forgiven, you could be dealt an income tax bill for thousands of dollars.
Alternative Income-Based Options
IBR is not the only option to consider when it comes to income-driven repayment (IDR) for your student loans, and it’s important to understand each option thoroughly before choosing one or the other. Another income-driven repayment option might benefit you more than IBR, based on your financial situation and the type of loans you have.
There are four IDR plans to consider:
- Income-Based Repayment (IBR)
Borrowers who take out student loans on or after July 1, 2014, have payments capped at 10% of discretionary income and will make payments for 20 years.
- Income-Contingent Repayment (ICR)
An ICR plan allows you to pay the lesser between either 20% of your discretionary income or what you would pay with a fixed plan over 12 years. Borrowers who qualify for the 20% option can make payments under ICR for up to 25 years.
Under a PAYE plan, your payment is equal to 10% of your income and never exceeds what your payment would be under a standard 10-year plan. The repayment term under PAYE plans is 20 years.
A REPAYE plan caps your payment at 10% of your discretionary income. If you have loans from graduate or professional school, your income term can last up to 25 years.
The best IDR plan for you depends on your goals (smaller monthly payments, a shorter loan term, forgiveness after 20 years, etc.), as well as what kind of loans you need to pay off.
Get Started and Apply for IBR
Applying for IBR is fairly simple, but you should be prepared to submit income verification information. You can apply for IBR and the other types of income-driven repayment plans online at StudentLoans.gov using your FSA ID or via paper application.
While IBR isn’t right for everyone, if you need help making your monthly payments, it can be better than defaulting on your loans or having a negative mark on your credit report for many years to come. The benefits of the Department of Education’s Income-Based Repayment program are extensive and designed specifically to help individuals and families in financial need while ensuring that the Federal Student Loan Program stays healthy and available for future students.