What Is Income-Based Repayment and Do I Qualify?

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Editor’s Note: In response to the coronavirus pandemic, as of March 13, 2020, the Trump Administration has halted interest payments on federal student loans. Please note that this applies to federally held student loans only and may not apply to your private student loans. Also note that student loan payments are still required, however your entire payment will now be made toward the principal of the loan. Check with your student loan provider for more information.

Making a monthly student loan payment can be a painful experience, especially if you are struggling to make ends meet.

For many individuals and families, student loans are a source of major stress and can affect life decisions like buying a home, starting a family, and more. Others are just trying to make ends meet while starting their careers.

One option that could lower monthly student loan payments and provide financial relief is Income-Based Repayment. So, what is Income-Based Repayment and is it an option for you?

Let’s dive in and take a look.

What is Income-Based Repayment (IBR)?

Income-Based Repayment, or IBR, is a student loan repayment plan offered by the U.S. Department of Education. IBR is one of four Income-Driven Repayment (IDR) plans available for federal loans. These repayment plans are designed for students who can’t afford their monthly loan payments under the Standard 10-year Repayment Plan, which is what students receive by default.

How does IBR work? Like the other IDR plans, your monthly loan payments will be based on your income. This is especially helpful if you’ve just graduated, have an entry-level or low paying job, or have a lot of student loan debt compared to an average income. Your payment for IBR plans depends on when you took out your loans.

• If you were a new borrower on or after July 1, 2014, your payments will be approximately 10% of your discretionary income. Regardless of income, your payment will never be higher than the 10-year Standard Repayment Plan.
• If you weren’t a new borrower on or after July 1, 2014, your payments will be approximately 15% of your discretionary income. Regardless of income, your payment will never be higher than the 10-year Standard Repayment Plan.

What is discretionary income? It’s calculated by taking your adjusted gross income and subtracting 150% of the annual poverty line for the size of your family and your state of residence. IBR plans are individualized to each person.

You may not benefit from an IBR plan if you have a higher income. For married borrowers, your payments might be based on your combined income. This happens if you file taxes jointly. You could benefit from IBR more if you file taxes separately. You’ll need to calculate if there’s a savings advantage by doing so. If you don’t qualify, you may consider refinancing your student loans with a private company instead.

Am I Eligible for IBR?

To qualify for an IBR plan, you must have certain types of federal student loans. Loans that are eligible for an IBR plan include:

• Direct Subsidized and Unsubsidized Loans
• Direct Consolidation Loans
• Direct Graduate PLUS loans
• FFEL Consolidation Loans

Direct Plus loans made to parents don’t qualify for IBR. Other types of federal student loans for parents are also ineligible, including Direct Consolidation Loans originally made to parents. If you have a Perkins loan or an FFEL loan, you’ll need to consolidate those loans into a Direct Consolidation Loan to qualify for IBR.

Know What You Owe – Before doing anything with your loans, you need to know what you owe. Using a free app like Credit Sesame helps you determine how much you owe and to whom. You’ll also get a free monthly credit score and receive updates when anything changes with your credit. Get a free Credit Sesame account here.

How Long Do I Make Payments For?

Depending on when you took out your original loans, you’ll make payments on an IBR plan for 20-25 years or until your loan is paid off.

For undergraduate loans, any remaining loan balance after 20 years will be forgiven. For graduate or professional loans, you’ll pay up to 25 years until any remaining loan balance is forgiven.

While having your loans forgiven is great, there’s a catch. With IBR loan forgiveness, the IRS views the forgiven amount as taxable income. You are required to claim that amount on your taxes the year it was forgiven. This could lead to a huge tax bill at the end of your loan life, so you’ll need to factor that into whether you’ll pursue IBR or not. It can be hard to judge what your financial situation will be 20-25 years from now, so consider this issue carefully.

Income-Based Repayment can also be paired with the Public Service Loan Forgiveness (PSLF) Program. These loans are handled through Fedloan, and there are separate requirements to qualify for PSLF. With PSLF, however, you’ll get lower monthly payments and avoid the giant tax bill after your loans are forgiven.

How to Apply for IBR

To apply for IBR, you’ll need to head over to StudentLoans.gov, the Federal Student Aid website. You’ll create a Federal Student Aid ID, which will allow you to view your application status and later, see your loan information.

You’ll need some information handy as you wade through the application process. This includes:

• Personal information like your address, phone number, social security number, etc.
• Your student loan information
• Your current income
• Tax information
• Your spouse’s information (if applicable)
• Information about your family (if applicable)

You can either apply online or by mail. To mail in your request, just get a form from your loan servicer, fill it out, and send it in with any necessary documentation.

As long you are part of an Income-Based Repayment Plan, you’ll have to re-certify your income and family size each year. This will recalculate your monthly payment as your income changes from year to year. As your income goes up, your payment is likely to go up as well. Keep this in mind if you think you have a raise in your future or want to start a side gig to earn more money.

How Does IBR Affect My Loans?

Although you may love having a lower student loan payment, there is a trade-off. You’ll probably end up spending more money over the life of your loan.

Even though your payments are lower, you’ll be accruing interest for 20-25 years. That’s an extra 10 to 15 years of paying interest on your student loans, which can add tens of thousands to your loan balance over the life of the loan.

Bottom Line: Is Income-Based Repayment Right for You?

Student loan payments are a financial burden for most borrowers. Switching to a lower monthly payment can provide much-needed relief, but it might not be worth it in the long run.

Take time to analyze your current and future financial situation to determine if an IBR plan would make sense for you. If you don’t have a monthly budget yet, create one. Then use a budgeting app like Pocketsmith to project your future financial picture.

Refinancing or consolidating your loans with a private lender is another option to consider. With these options, you will lose some financial protections that federal loans offer – such as the PSLF Program and loan deferment or forbearance if you hit hard times.

Again, it’s important to weigh your options carefully. That way, you can make the best decision for both your current and future financial situation.

Are you using an Income-Based Repayment Plan? Share your experiences and advice with us!

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