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Everything To Know: Income-Based Repayment (IBR)

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If you’re looking to get a more manageable monthly payment on your federal student loans, an Income-Based Repayment plan could be a good idea. An IBR is one of four programs through the federal government’s Income-Driven Repayment (IDR) plan.

An IBR can help you if your monthly student loan payments are unaffordable because your student loan debt is high compared to your current income.

If this sounds like you can relate, check out our Income-Based Repayment (IBR) guide below.

What is Income-Based Repayment (IBR)?

For low-income earners just out of college, the Department of Education offers four Income-Driven Repayment (IDR) plans. The most popular and widely used IDR is the Income-Based Repayment (IBR) option for federal student loans. It helps the student who can’t afford their standard monthly student loan payments by capping the amount owed each month based on income and family size.

The IBR plan is ideal for new graduates and for students supporting a spouse or minor children. It also forgives any remaining debt after 25 years of qualifying payments, meaning you won’t be stuck paying on student loans forever.

How Do Income-Driven Repayment Plans Lower My Monthly Student Loan Payments?

When you graduate, you’re automatically put on the Standard Repayment Plan with fixed payments divided over a period of 10 years. This gets your loan paid off the fastest and with the least amount of interest, but the monthly payments can be quite high. With some student loan payments rivaling the cost of a monthly mortgage, you’re probably thinking about all the other things you’d rather do with that money.  Think of the vacation you could go on or the investment account you could grow instead!

The good news is that income-driven repayment plans will help reduce your monthly student loan payment to a manageable percentage of your income. Instead of calculating your payments according to your student loan balance, the amount due each month is based on your income level.

Specifically, IBR plans set your payments at 10 to 15 percent of your discretionary income, and your payment could be as low as $0 a month depending on your family size and the amount owed.

If I Qualify for an Income-Based Repayment or other IDR Plan, How Do I Enroll?

To qualify for an income-based repayment plan, or any other of the income-driven repayment options, you have to have one of the following types of student loans, and it had to have been made under the Direct Loan or Federal Family Education Loan (FFEL) Program:

  • Federal Stafford Loan
  • Grad PLUS
  • Direct Consolidated Loan

There are some student loan options that do not qualify for IDR plans. If you have an uninsured private loan, Parent PLUS loan, Perkins loan, you won’t qualify. Or if you’re behind on paying your loans, those aren’t eligible, either.

In addition to having a qualifying loan, you must also demonstrate a “partial financial hardship” when applying. To determine how much a borrower can pay, your discretionary income is calculated by comparing your adjusted gross income (AGI), family size, and your state of residence to 150 percent of the poverty line. If that number is less than the monthly payment required under the Standard 10-year Repayment plan, you are eligible for IBR.

To start the enrollment process, first contact your student loan provider since it’s a little different for each one. From there, they’ll direct you through the process of switching to an IDR plan. When you apply, you’ll need to verify your income because that is the central factor in determining how your payments are set.

Is the Income-Based Repayment Plan Right for Me?

With 73 percent of graduates in the class of 2017 enrolled in the Income-Based Repayment Plan, it’s the most attractive choice for those with student loan debt. However, there are four different Income-Driven Repayment Plans to consider.

  • Revised Pay As You Earn Repayment Plan (REPAYE Plan)
    This IDR plan was introduced in 2015, making it the newest option for IDR plans. With the Revised Pay As You Earn plan, your monthly payments are capped at 10 percent of your discretionary income. The downside is that there’s no limit on how much your monthly payment can be, and your REPAYE payment could be higher than if you had stuck with the Standard 10-year plan.
  • Pay As You Earn Repayment Plan (PAYE Plan)
    Similar to the REPAYE plan, your payments are calculated at 10 percent of your discretionary income. The difference here is that your monthly payments must be smaller than your payment under the Standard Repayment Plan to qualify. Plus, after 20 years of payments, the PAYE Plan offers loan forgiveness.
  • Income-Based Repayment Plan (IBR Plan)
    There are two classes of IBR Plans: one for borrowers issued loans before July 1, 2014, and another for borrowers on or after July 1, 2014. For new borrowers, your monthly payments won’t be more than 10 percent of your discretionary income, and you’ll be eligible for loan forgiveness after 20 years of payment. For older borrowers who were issued their first loans before July 1, 2014, your monthly payment is limited to 15 percent of discretionary income, and you won’t be eligible for forgiveness until after 25 years of repayment.
  • Income-Contingent Repayment Plan (ICR Plan)
    Though part of the income-driven repayment options, the ICR plan doesn’t use your income to determine eligibility. If you didn’t qualify for the other repayment plans, you might still be able to enroll in the Income-Contingent Repayment Plan. Monthly payments are calculated at 20 percent of your discretionary income, which is a little higher than the others, but you’re still eligible for loan forgiveness after 25 years of repayment.

What Are the Pros of Income-Driven Repayment Plans?

The most obvious advantage is that any of the four income-driven plans can lower your monthly payment obligation. For a new graduate who can’t find a job or has a low starting salary of $30,000 a year, having a payment based on income makes them manageable and can help you accomplish your financial goals. And if you suddenly find yourself without a job or you take a drastic cut in pay, your monthly payment is recalculated to match your new income level.

There’s also the option of student loan forgiveness after 20 to 25 years of on-time payments, depending on which IDR plan you choose. However, if you’re eligible for Public Service Loan Forgiveness, your student loan forgiveness will activate after just ten years.

Are There Any Cons to Income-Driven Repayment Plans?

Though the income-driven options sound great, there are a few drawbacks to consider before jumping on board. The first and perhaps most apparent disadvantage is that, because you’re paying less each month, it will take you much longer to pay back your student loans. For instance, your repayment period will go from 10 years on the Standard Repayment Plan to 20 or 25 years under any of the income-based plans. Also, paying longer means you’ll also be accruing and paying interest for 10 to 15 more years.

Since your monthly payments are smaller on an income-driven plan, and you’re still accumulating interest, your payments might not cover the cost of the interest charges. In this situation, if your student loan balance is very high, your balance may grow instead of shrink over time due to unpaid interest.

Also, it’s important to know that according to the current Internal Revenue Service (IRS) rules, any loans forgiven under the IDRP plans are considered taxable income. To avoid that big tax bill, shopping around for a lower rate on your student loan might be a better option. Using DollarGeek’s Income-Based Repayment Calculator will tell you if the IDR plan or refinancing your student loan at a lower rate will serve you better financially.

DollarGeek’s Final Thoughts

While the income-based repayment or other IDR plans can help you control your finances, make sure you take the time to consider all the facts before choosing one. The expert team at DollarGeek recommends sticking to a monthly payment of around 10 percent of your income. If your Standard Repayment Plan amount is in that range, you won’t benefit from switching to an IDR plan. But, if you think you might qualify, or you need help repaying your student loans, it’s always best to reach out to your student loan servicer to select the plan that works best for you.