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Income-Based Repayment: Ultimate Guide

income based repayment

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Introduced in 2009, the Income-Based Repayment (IBR) plan adjusts your student loan payments to 10% or 15% of your discretionary income, depending on when you borrowed. If you’re not bringing in any income, your payment could be as low as $0 per month on IBR (score!). Read on to learn exactly how the IBR plan works for student loans and who it’s best for.

How Income-Based Repayment works

Like the other income-driven repayment plans for student loans, IBR determines your monthly payment as a percentage of your discretionary income. But unlike the other plans, the date you borrowed will impact your payment.

If you were a new borrower on or after July 1, 2014, your payments will be set at 10% of your discretionary income. But if you borrowed before that date, your payments will be set a little higher at 15%.

Let’s say, for example, your discretionary income is $2,000 per month. If you’re a new borrower, your student loan payment will be $200. If you’re an older borrower, it will be $300. (Discretionary income, by the way, is the difference between your gross income and 150% of the poverty guideline.)

The date you borrowed also impacts your repayment terms. New borrowers (on or after July 1, 2014) will have a loan term of 20 years, whereas those who borrowed earlier will have a longer loan term of 25 years.

If you still have a balance at the end of your term, the remainder will be forgiven. Any forgiven amount, however, will be treated as taxable income.

What loans are eligible for IBR?

Most federal student loans are eligible for the Income-Based Repayment plan, with the exception of parent loans or consolidation loans that contain loans made to parents. Eligible loans include,

  • Subsidized Direct loans
  • Unsubsidized Direct loans
  • Direct PLUS loans made to graduate or professional students
  • Direct consolidation loans that don’t include any parent loans
  • Subsidized FFEL loans
  • Unsubsidized FFEL loans
  • FFEL PLUS loans made to graduate or professional students
  • FFEL consolidation loans that don’t include any parent loans
  • Perkins loans, if consolidated

Unlike the Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) plans, FFEL loans are eligible for IBR as they are. For PAYE or REPAYE, you have to consolidate FFEL loans via a Direct consolidation loan before they’re eligible.

Pros of the Income-Based Repayment plan

So, what are some pros of IBR, especially as compared to the other income-driven repayment plans? Here are six that stand out.

Sets payments as low as 10% of income

If you’re a new borrower, your payments could be adjusted to 10% of your income. This is the lowest amount you’ll find on an income-driven plan. Note that PAYE and REPAYE also adjust your payments to 10% of your income.

Won’t allow payments to exceed the standard plan

On IBR, your payments will never be greater than what they’d be on the standard 10-year plan. So if you start making more income in the future, you don’t have to worry about your 10% or 15% payments increasing more than what you’d be paying on the standard plan.

Forgives remaining balance at the end of your term

Like the other income-driven plans, IBR could end in student loan forgiveness if you still have a balance at the end of your term. Your loan servicer should let you know if you’re on track toward loan forgiveness or if you’ll pay off your debt ahead of that date.

Won’t include spouse’s income if you file separately

If you’re trying to get the lowest student loan payment possible, you probably don’t want your loan servicer to include your spouse’s income when calculating your student loan bill. On the IBR plan, your spouse’s income won’t count if you file your taxes separately (it will if you file jointly).

This could give IBR an advantage over REPAYE, which takes both spouses’ incomes into account regardless of whether you file separately or together.

Has an interest subsidy

If you get your loans on IBR, you will get some help paying for interest charges. On IBR, the government will cover 100% of the unpaid interest on your subsidized loans for three years.

Allows FFEL loans, even if you don’t consolidate first

The FFEL loan program stopped originating loans in 2010, but you might have an FFEL loan if you borrowed before that time. For the other income-driven plans, FFEL loans are only eligible if you consolidate them first. But for IBR, they’re eligible just as they are.

Cons of the IBR plan

While Income-Based Repayment has several advantages for borrowers, here are some possible downsides.

Has stricter eligibility requirements than some other plans

To get on IBR, you must show you have partial financial hardship. This basically means that your payment on IBR must be lower than what it would be on the standard 10-year plan.

Since many borrowers apply for income-driven repayment to lower payments, this likely won’t be a hard piece of criteria to meet. But if you can’t qualify, you could consider REPAYE instead, which has no such income requirement.

Might have worse terms than PAYE or REPAYE

If you borrowed loans before July 1, 2014, the IBR plan will set your payment at 15% of your income and extend your terms to 25 years. These are worse terms than you’ll find on PAYE or REPAYE, which set your payments at 10% of your income regardless of when you borrowed.

These plans also limit your terms to 20 years (the one exception is REPAYE, which sets your term at 25 years if you have loans from graduate school). If you’re not a new borrower, the IBR plan might not be as helpful to you as PAYE or REPAYE.

Will likely increase your interest costs

This last downside isn’t specific to IBR; it applies to all income-driven plans. When you add years to your debt, you increase your interest costs. So even though these plans make your loans more affordable in the short term, they actually make them more expensive overall.

This might not matter if you need relief now. But if you can afford the standard 10-year plan, you’ll pay less interest over the long run and likely get out of debt sooner.

Who is the IBR plan best for?

Given the pros and cons of Income-Based Repayment, who is this plan best for? Well, it tends to be better for borrowers who took out loans after July 1, 2014, rather than those who took out loans before.

It’s also a useful option for borrowers with FFEL loans who don’t want to go through the process of Direct loan consolidation before getting their loans on income-driven repayment.

Ultimately, though, you’re probably looking for the income-driven repayment plan that will get you the most affordable monthly payments.

If you’re not sure which income-driven repayment plan that is, speak with your loan servicer for guidance on your individual situation.

How to apply for the Income-Based Repayment plan

To get your loans on an income-driven repayment plan, simply submit a request online at StudentAid.gov. You’ll need to provide some documentation of your income, as well as your personal information.

Again, your loan servicer can guide you through the process. The website can also direct you to the income-driven plan that will lower your student loan payment the most.

Alternative ways to get relief on your student loan payments

As mentioned, there are three other income-driven repayment plans that can adjust your student loan payments:

Two other alternatives to the standard 10-year plan are,

  • Extended repayment
  • Graduated repayment

Finally, you could consider refinancing your student loans for better interest rates and new terms. Be cautious about refinancing federal student loans, though, since doing so will turn them private and make them ineligible for all these federal student loan repayment plans.

Think about your goals for your student loans, whether you want to lower payments, save on interest, or get out of debt faster. Once you have a clear destination in mind, you can find the strategy that will help you get there.

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