Income Based Repayment: A Good Option for You?

Starting July 1, a new repayment option has become available for some federal student loans: Income Based Repayment (IBR). It’s meant to ensure that borrowers with lower incomes and higher family costs aren’t overburdened with large loan payments. This new repayment option has the potential to provide relief for many borrowers. But is it right for you?

The Basics

In IBR, borrowers with a certain degree of financial hardship have their monthly repayment amount capped at 15% of their discretionary income for a maximum repayment period of 25 years. The benefit for borrowers is a lower monthly payment, one that shouldn’t put an undue burden on borrowers or families with limited means. Of course, the drawback is that borrowers pay more interest over time. After 25 years, any remaining loan balance is forgiven.

Are Your Loans Eligible?

If you’re wondering if IBR is right for you, you’ll need to check if your loans are on the list of eligible loans.

Loans eligible for IBR include:

• – Subsidized and Unsubsidized Stafford Loans
• – SLS Loans
• – Grad PLUS Loans
• – Consolidation loans without underlying Parent PLUS Loans
• – Perkins Loans may be included

However, the following loans are not eligible for IBR:

• – Parent PLUS Loans
• – Consolidation loans with underlying Parent PLUS Loans
• – Perkins Loans unless they are included in a consolidation loan
• – Private, state, and other nonfederal student loans
• – Loans in default

Are You Eligible?

To qualify as eligible for IBR, you must display what’s called partial financial hardship. This determination of the relationship between your income and your loan debt is measured based on the following questions: What is the annual payment amount due on your IBR-eligible loans under a standard 10-year repayment plan? (Remember, a standard repayment plan distributes your payments evenly every month over 10 years.) Is this annual amount due on your loans more than 15% of your annual discretionary income?

Your discretionary income is calculated as the difference between your adjusted gross income and 150% of the federal poverty level. ASA’s IBR page offers a helpful IBR calculator, and you can find more information on the Department of Education’s website.

Is IBR Right for You?

If you feel greatly burdened by your loan payments, and you anticipate that your discretionary income will remain low, then IBR may be the right choice for you. However, it’s important to keep in mind that, the less you pay every month toward your loan balance, the more you accrue in interest charges. The federal government will grant you an interest subsidy on your subsidized Stafford loans for only the first 3 years under IBR, and interest continues accruing for unsubsidized loans. That means that you may end up repaying more over the long term.

Under IBR, as your income rises, your monthly repayment amount will likely be recalculated, but it will always remain under 15% of your discretionary income. So, if you believe that your financial hardship will be temporary, it may be a wiser choice to seek a temporary deferment or forbearance, or to choose a different repayment plan, until your situation improves. Of course, under every repayment plan, you have the option of paying more than the minimum required payment some or all months, without penalty

Fortunately, repaying your federal student loans isn’t an all-or-nothing proposition—several payment plans exist, and you should examine them all before deciding which one is right for you.

For more information on IBR, visit ASA’s IBR page, or call one of our borrower information specialists at 866.493.5563 to talk through your situation. Remember—you have options!

Posted by Mike Ryan on July 10, 2009 at 03:30 PM EST

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