Income-Based Repayment is a plan that can substantially lower the amount you must pay each month on your federal student loans. It does this by capping the monthly payments at 15% based on your Adjusted Gross Income (AGI) and family size.1
IBR uses a kind of sliding formula to determine how much you can afford to pay on your federal loans. For many eligible borrowers, your monthly payment amount will be less than 10% of your income.2
How Does IBR Work?
Typically, if you have a partial financial hardship3 – that is, you earn less than what you owe in federal student loans, you are eligible to choose IBR – regardless of when the loan was taken out.
Once in IBR, your loan servicer will calculate your monthly payment amount based on your income, rather than the amount you owe. The IBR will also forgive the remaining debt, including interest, if any, after 25 years of qualifying payments.
Under the new Income-Based Repayment plan, that cap is set to be lowered in 2014 to 10% and any remaining debt will then be forgiven after 20 years. 4
Although this program can lower your monthly student loan payment by hundreds of dollars, these lower payments may however, result in a longer repayment period and additional accrued interest. In other words, if you do the math, the IBR program could actually end up costing you far more than you save.
IBR-eligible Loans
If you intend to enroll in IBR, make sure you have the right types of federal loans. Income-based repayment is only available for federal student loans, such as the Stafford, Grad PLUS and consolidation loans.
It is not available for Parent PLUS loans or for consolidation loans that include Parent PLUS loans as well as private student loans.
How Much Will I Pay?
Under IBR, your monthly loan payment amount will be less than the amount you would otherwise be required to pay under a 10-year standard repayment plan.
The following chart shows the maximum IBR monthly payment amounts for a sample range of incomes and family sizes using the Poverty Guidelines that were in effect as of January 20, 2011.5
If you earn below 150% of the poverty level for your family size, the monthly payment under IBR will be $0. If your income is more, your loan payment will be capped at 15% of whatever your adjusted income is.
For example: say you have $50,000 in federal student loans at an interest rate of 6.8%, with a standard repayment term of 10 years. Your monthly payment would be $443. With IBR, if you are a family of one, earning an adjusted gross income of $40,000, then your monthly payment amount could be reduced to $296. If you are a family of three, your monthly payment could drop to $153.
The Dept of Education has also set up a dedicated site with an IBR calculator to determine your monthly payments based on your income and family size.
In the event your income increases to the point where you no longer have a partial financial hardship, any unpaid interest that has accumulated would be added to your total loan balance and your payments will be capped at the 10-year standard monthly payment plan.
How Do I Apply?
As long as you have a partial financial hardship, you may apply for IBR plan for your federal loans.
- If you are entering repayment, you may select the Income-Based option on the repayment selection form.
- If you are already in repayment, you may request to switch to the IBR plan.
In both situation, your lender or loan servicer will confirm your eligibility and calculate your income-based monthly payment amount.
For more information about and how to apply for IBR, contact the servicer(s) of your student loans. If you are not sure who your loan servicer is, you can look it up on www.nslds.ed.gov.
References- The Dept of Education already offered an “income-contingent repayment” plan, which was similar, but less generous. [↩]
- Source: Equal Justice Works [↩]
- A partial financial hardship is when the 10-year standard monthly payment on what you owed when you first entered repayment is more than 15% of discretionary income. [↩]
- Source: FastWeb [↩]
- Source: http://studentaid.ed.gov/ [↩]