Income Based Repayment (IBR)

NEWS ALERT

In 2014, a law will improve the IBR rules to help make more students eligible. Your monthly payment will be capped at 10% of discretionary income. Also, any amount you have not repaid after 20 years of payments will be forgiven. In the meantime, President Obama created a short term plan starting in late 2012 to allow borrowers to start benefitting from these rules sooner rather than later. Based on changes to federal regulations, a new Pay As You Earn (PAYE) repayment was created to mirror the 2014 IBR rules.

If you have a lot of student debt and not enough income to pay it, IBR is the payment plan for you. IBR is designed to allow FFEL and Direct Loan (except parent PLUS) borrowers with low incomes to make lower payments. To qualify, borrowers must apply and document their income annually to prove they meet strict requirements. As with other repayment plans, borrowers are still eligible for the .25% interest rate reduction for automatic debit repayment.

Eligibility requirements: the feds calculate what they consider is a manageable repayment for you. Using your pre-tax income, they make a calculation using the federal poverty index (15% of whatever you earn above 150% of the current poverty level with a loan term of 25 years). Translated: if you have a lot of debt and not a lot of income, you're probably set.

To apply for IBR, you need to:

  • Document your income. Most often this will be your adjusted gross income (AGI) on your taxes, including your spouse's income (if you have one).
  • Record family size. Being married or having kids improves your eligibility.
  • Report your state of residence. Because of high living expenses, living in Alaska or Hawaii increases your chance of qualifying.
  • List all your student loans. For once in your life, more debt is better—at least in terms of helping you qualify.

Borrowers interested in applying for the Public Service Loan Forgiveness Program may use IBR for some of their 120 qualifying payments. To discuss if this program is right for you, consult with your financial aid office or U.S. Department of Education.

If you were a new borrower after October 1, 2007 and had another loan disbursed on or after October 1, 2011, consider the Pay As You Earn (PAYE) repayment plan for even lower payments.

Pros

  • Affordable payments as low as $0
  • Payments eligible for Public Service Loan Forgiveness
  • Remaining payment cancellation after 25 years of repayment if you remain in program
  • Subsidized loan interest payments for any unpaid interest for up to 3 years if the calculated monthly payment is less than the monthly accrued interest
  • No prepayment penalties

Cons

  • Requires an annual application which includes reporting on income and family size
  • Monthly payments may be less than accrued interest (negative amortization)
  • Unpaid interest capitalized (added to principal balance) if you leave the plan
  • Takes longer to pay back
  • Total cost of the loan is higher
  • May have to pay taxes on the amount forgiven
  • Parent PLUS or Consolidation with Parent PLUS do not qualify