Looking for a way to get a better handle on your federal student loan payments? Then you might want to consider an Income-Based Repayment (IBR) plan.
IBR is a type of income-driven repayment (IDR) plan and can help you lower your monthly student loan payments. If your payments are unaffordable due to a high student loan balance compared to your current income, an IBR plan can help.
If this sounds like a good option for you, check out our complete guide to Income-Based Repayment for federal student loan borrowers below.
What is Income-Based Repayment (IBR)?
The term Income-Based Repayment is often misused as a catch-all for the various income-driven repayment programs available today.
However, it’s a specific type of plan offered by the Department of Education that helps students who can’t afford their monthly federal student loan payments under the Standard Repayment Plan.
Since IBR falls under IDR plans, let’s first take a look at what these types of plans have in common.
How income-driven repayment plans lower your monthly costs
The 10-year Standard Repayment schedule is the default for student loan borrowers, but it’s not always affordable.
High student loan balances will mean high monthly payments, which can be challenging to keep up with. Plus, borrowers who have lower incomes relative to their debt and costs of living might struggle to keep up with the Standard Repayment schedule.
This is where income-driven repayment plans can come in. Instead of setting payments according to your student loan balance, the amount due each month is tied to your income. According to the Federal Student Aid Office, such a plan “sets your monthly student loan payment at an amount that is intended to be affordable based on your income and family size.”
Specifically, IDR plans set payments at a percentage of your discretionary income. For example, Income-Based Repayment sets your payments at 10-15 percent of your discretionary income, depending on when your loans were disbursed.
Your 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. This means your student loan payments are individualized to match your specific income, costs of living, and family needs.
Enrolling in Income-Based Repayment or other IDR plan
Only federal student loans are eligible for income-driven repayment plans, not private student loans. The types of federal student loans you have might also determine the IDR plans you’re eligible to enroll in.
Additionally, you’ll need to apply for an income-driven repayment plan before you can access these lower payments. To enroll in IBR or other IDR plan, contact your student loan servicer. Your servicer can direct you through its specific process of switching you loans over to an IDR plan.
Since your income is central to how your payments are set, you’ll also need to certify your income upon initially enrolling in an IDR plan. These plans are reevaluated every year, so you’ll need to recertify your income annually to stay on the plan, as well.
You can also recertify your income at will should your income suddenly change, such as after a job loss.
Comparing Income-Driven Plans
For new borrowers on or after July 1, 2014, IBR caps payments at 10 percent of your discretionary income. These borrowers will also receive forgiveness after 20 years of repayment.
For borrowers who were issued their first loans before July 1, 2014, IBR limits payments to 15 percent of discretionary income. These borrowers will be eligible for forgiveness after 25 years of repayment.
Federal student loans eligible for Income-Based Repayment:
- Direct Subsidized and Unsubsidized Loans
- Direct Graduate PLUS loans
- FFEL Consolidation Loans
- Federal Direct Consolidation Loans
Federal student loans not eligible for IBR:
- Parent PLUS loans
- Any other type of federal loan made to parents
- Direct Consolidation Loans that repaid loans made to parents
- Private loans
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.
Your prospective monthly payments must be smaller than your standard payments in order to qualify for PAYE plan, which are calculated at 10 percent of your discretionary income. The PAYE plan offers student loan forgiveness after 20 years of repayment.
To qualify for PAYE there are specific requirements you must meet:
- 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.
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 monthly payments. So you can participate in REPAYE even if your monthly payments are higher than they would be on a Standard 10-year plan.
Additionally, REPAYE offers student loan forgiveness after 20-25 years.
REPAYE also includes an interest subsidy that can be a huge benefit for borrower with monthly payments that don’t cover interest charges. If they are on REPAYE, 100 percent of unpaid interest each month is paid for on subsidized loans. And 50 percent of unpaid interest is subsidized for unsubsidized student loans.
Income-Contingent Repayment (ICR)
The Income-Contingent Repayment plan stands out among IDR plans 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.
Income-Contingent Repayment also offers student loan forgiveness after 25 years.
Should you switch to income-driven repayment?
There are some major benefits to enrolling in an income-driven repayment plan. But Income-Based Repayment and other IDR plans have some potential drawbacks, as well.
Here are the central pros and cons you should be aware of as you consider enrolling in an IDR plan.
Pros of income-driven repayment plans
Monthly payments are more manageable: All income-driven repayment plans for federal student loans can lower your monthly payments if you have low income compared to your student loan balance.
Adjust payments when your income changes: If your hours are cut or you lose a job, you can re-certify your new income. Monthly payments will be recalculated according to changes in your income; they can be as low as $0 if your financial situation warrants it.
You can get student loan forgiveness: Depending on when you first borrowed and the IDR plan you choose, you can become eligible for student loan forgiveness after 20-25 years of on-time payments. Keep in mind, however, that the forgiven balance will likely be taxed as income for that year it’s forgiven.
Take advantage of Public Service Loan Forgiveness: If you’re eligible for Public Service Loan Forgiveness, enrolling in Income-Based Repayment or a similar income-driven plan can lower payments and help you maximize the benefits of this program. PSLF grants student loan forgiveness on the remaining balance after just 10 years.
Cons of income-driven repayment plans
Loans take longer to repay: Since you’re paying less each month, it will take longer than the typical 10 years on the Standard Repayment Plan to get out of student debt. IDR plans stretch repayment out over 20-25 years.
IDR student loan forgiveness isn’t free: Under current tax laws, any remaining student loan balance forgiven as part of income-driven repayment is considered taxable income. So while you might get a large portion of your remaining balance wiped out, it could come with a sizable tax bill.
You might pay more in interest: Smaller payments are great for your budget — but they can cause you to end up spending more over the life of your loan. That’s because you’ll be accruing and paying interest for an additional 10-15 years.
Student loan balance could grow: If your student loan balance is very high, you might have high monthly interest charges. But under IDR, your monthly payments might not cover your interest. Interest that goes unpaid could be added to your balance and cause it to grow instead of shrink.
Lots of paperwork: You’ll have to apply for Income-Based Repayment or other income-driven repayment plan. You’ll also have to recertify your income every 12 months.
Your choices might be limited: Not all federal student loans will qualify for IDR. You might be eligible only for certain plans. Other borrowers might have to consolidate federal student loans to become eligible for IDR.
Your income might be too high to qualify: If 10 percent of your income is higher than your monthly payment on a Standard Repayment Plan, then you would not benefit from an IBR plan. Therefore, you would not qualify.
If you’re married, payments might be set according to your combined income. For some income-driven plans, your student loan payment is based on the combined income and loan debt of both you and your spouse. Keep this in mind if you file a separate tax return from your spouse, or if you file one together.
Is Income-Based Repayment right for you?
Still trying to decide whether an IBR or other IDR plan is right for you? Here are a few things you should keep in mind in terms of your budget and financial situation.
1. Estimate your monthly payment
Before settling on Income-Based student loan repayment, estimate what your new monthly payment will be.
Use our calculator below to view your prospective monthly payment amount. Be sure to review your budget and see if you can afford this new payment amount.
INCOME BASED REPAYMENT (IBR) CALCULATOR
2. 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?
Well, if you’re banking on student loan forgiveness keep in mind that any forgiven debt under an income-driven plan is taxable (unless it’s through PSLF).
Be sure to discuss the tax implications with a professional so you know what to expect before applying for income-based student loan repayment.
3. 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.
Remember, Income-Based Repayment or another IDR plan can help you regain control of your finances while allowing you to repay your student loans faster. Make sure you take the time to research the best options, estimate your new monthly payment and talk to an expert if you need more help before selecting a plan that works for you.
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