Student loans seem like a smart investment while you’re pursuing higher education. But after graduation, they can become a heavy financial burden on your budget and income. Thankfully, there’s a way to relieve this financial pressure so you can maximize your student loan repayments and get rid of debt faster: Income-Based Repayment (IBR)
If you have federal student loans, you may be eligible for Income-Based Repayment or another similar income-driven plan. Eligibility for these options is based on your income and family size, but they all work a bit differently. Be sure you know the rules and what type of plan is best for you.
Here’s the complete guide to Income-Based Repayment for borrowers with federal student loans.
What is Income-Based Repayment (IBR)?
While the term “Income-Based Repayment” is often used as a catch-all for the various income-driven repayment programs available today, it’s actually a specific type of plan that helps students who can’t afford their monthly federal student loan payments under the Standard Plan.
Under IBR, payments are capped at 10-15 percent of your discretionary income, depending on when you first took out your federal student loans. For new borrowers on or after July 1, 2014, IBR caps payments at 10 percent of discretionary income; for borrowers who were issued their first loans before July 1, 2014, IBR limits payments to 15 percent of discretionary income.
(Discretionary income is calculated by finding the difference between your adjusted gross income and 150 percent of the annual poverty line for a family of your size and in your state.)
Additionally, loan forgiveness can be one of the biggest benefits of enrolling in the Income-Based Repayment Plan. After 20-25 years of payments, depending on when you first borrowed, you can have the remainder of you outstanding student loan balance forgiven.
Income-Based Repayment plans are reevaluated every year, which means you need to recertify your income annually to stay on the plan.
Income-Based Repayment can help lower your monthly payment on eligible federal student loans, including:
- Direct Subsidized loans
- Unsubsidized loans
- Direct Graduate PLUS loans
- Stafford loans
- FFEL Consolidation Loans
- Federal Direct Consolidation Loans
Not all types of loans are eligible for Income-Based Repayment, however. Generally, the loans that do not qualify are:
- Parent PLUS loans
- Any other type of federal loan made to parents
- Direct Consolidation loans that repaid loans made to parents
- Private loans
In addition, if you income is too high relative to your debt, you won’t qualify for IBR. That’s because IBR payments are capped at what your payment amount would be on the 10-year Standard Repayment Plan. If your payments would be higher based on IBR than Standard Repayment, you would not benefit from IBR and therefore, do not qualify.
Other types of income-driven repayment plans
While Income-Based Repayment is a popular type of repayment plan, it’s not the only one. Also consider these income-driven plans, which work similarly to IBR:
1. Pay As You Earn (PAYE)
Pay As You Earn is also a fairly new plan that was introduced in 2012 to help borrowers better manage their student loan debt payments.
To qualify for PAYE there are some strict guidelines you must follow:
- You must have taken out a student loan on or after October 1, 2007
- You must prove that you need assistance in repaying your student loans and have received disbursement of a Direct Loan after October 1, 2011.
- Your monthly payments must be smaller than your standard payments in order to qualify for PAYE plan, and are calculated at 10percent of your discretionary income.
A few other facts about PAYE:
- It allows for lower payments than ones available with Standard Plans
- All loans are eligible for forgiveness after 20 years
- Monthly payment is 10 percent of discretionary income
- Repayment term is 20 years
- Forgiven loans may be viewed as taxable income
2. Revised Pay As You Earn (REPAYE)
The Revised Pay As You Earn plan was introduced in December 2015 and is the newest option for income-driven repayment plans. All Direct Loans, Stafford Loans, and Graduate PLUS borrowers are eligible for REPAYE, as well as other federal student loans that are consolidated into Direct Loans.
Monthly payments are capped at 10 percent of your discretionary income. However, there’s no cap on how quickly you can repay your student loan, which is different than PAYE or IBR plans.
One drawback is that if you’re married, your student loan payment is based on the combined income and loan debt of both you and your spouse. This is significant since only your income will be used to determine the income-based repayment plan payment. Keep this in mind if you file a separate tax return from your spouse, or if you file one together.
A few facts about REPAYE:
- It allows for lower payments compared to IBR payments
- Undergraduate loans are eligible for loan forgiveness after 20 years
- Graduate loans are eligible for loan forgiveness after 25 years
- Monthly payment is 10percent of discretionary income
- Repayment term is between 20-25 years
- Spouse’s income is included in monthly payment calculation
- Interest subsidy is available to help cover interest charges
- Forgiven loans may be viewed as taxable income
3. Income-Contingent Repayment (ICR)
The Income-Contingent Repayment plan stands out compared to the rest of the income-driven repayment plans listed above. That’s because the borrower’s income isn’t a requirement for eligibility.
If you’ve applied for the other plans but were rejected, the ICR plan may be your next best option for reducing your monthly student loan payment. Monthly payments are calculated at 20 percent of your discretionary income, which may or may not be lower than the Standard Repayment Plan you currently have.
A few facts about ICR:
- Easier to qualify because income eligibility is not a factor
- Student loans may be eligible for loan forgiveness
- Monthly payment amount is 20 percent of discretionary income
- Repayment term is 25 years
- It has the highest payments and interest of all income-driven plans
- Monthly payment may be lower with a Standard Payment Plan
Is Income-Based Repayment right for you?
So how do decide whether the Income-Based Repayment plan or another income-driven plan is best for your budget and financial situation?
Estimate your monthly payment
Before settling on Income-Based Repayment, consider all the facts listed and then estimate what your new monthly payment will be.
You can also use our calculator below to view what your prospective monthly payment amount could be. Be sure to review your budget and see if you can afford this new payment amount.
Your monthly payment on IBR would be $149. If you income increases over time, your payments may increase. Assuming annual income growth of 5%, your final monthly payment would be $383. After making payments for 213 months, you will have paid a total of $60,755 and would receive $0 in forgiveness. $383 $149
INCOME BASED REPAYMENT (IBR) CALCULATOR
Results First month $149 Final payment $383 Balance paid $60,755 Total forgiveness $0 Repayment term 213mo
Your monthly payment on IBR would be $149. If you income increases over time, your payments may increase. Assuming annual income growth of 5%, your final monthly payment would be $383. After making payments for 213 months, you will have paid a total of $60,755 and would receive $0 in forgiveness.
Know the tax implications
Will you be able to pay off your student loans before the repayment term is complete, or are you expecting to have some debt forgiven after the payment period is up? Unfortunately, unlike Public Service Loan Forgiveness, any forgiven debt under an income-driven plan is taxable.
Be sure to discuss the tax implications of Income-Based Repayment with a professional so you know what to expect before applying.
Choose what’s right for you
Going for the lowest monthly payment is appealing, but don’t let that sway your entire decision.
Take into account all the facts before choosing IBR or a similar repayment plan. Otherwise, you could end up choosing a low monthly payment with an extended repayment period, costing you unnecessary money in extra interest. Sticking to a monthly student loan payment of around 10 percent is what most experts suggest.
Income-Based Repayment can help you regain control of your finances while allowing you to repay your student loans faster. Take time to research the best options, estimate your new monthly payment and talk to an expert if you need more help.
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