Income-Based Repayment
If you have high student loan debt and/or a low income, it may be difficult to follow a standard 10-year student loan payment schedule. That’s why Income-Based Repayment (IBR) was created. Available July 1, 2009, IBR bases payments on a borrower’s income and family size—making repaying education loans easier.
Are My Loans Eligible for IBR?
IBR is available to you whether you’re in the Direct Loan Program or the Federal Family Education Loan Program. Most federal loans are eligible, but there are a few exceptions.
Eligible loans include:
- – Subsidized and Unsubsidized Stafford Loans
- – SLS Loans
- – Grad PLUS Loans
- – Consolidation loans without underlying Parent PLUS Loans
- – Perkins Loans may be included
Ineligible loans include:
- – Parent PLUS Loans
- – Consolidation loans with underlying Parent PLUS Loans
- – Perkins Loans unless they are included in a consolidation loan
- – Private, state, and other non-federal student loans
- – Loans in default
How Does IBR Work?
To qualify for IBR, you must display partial financial hardship. Your lender determines this by calculating the annual payment amount due on your eligible loans under a standard 10-year repayment plan. If this exceeds 15% of your discretionary income, then you are eligible. Your lender will then cap the total monthly payments on your eligible loans at 15% of your discretionary income. For more on how that 15% is calculated, see “Do I have a Partial Financial Hardship?” below.
Once you enter an IBR plan, your lender will also recalculate your monthly payment amount based on a 10-year repayment schedule. This amount will be the maximum you’ll ever pay while in an IBR plan—even if you no longer demonstrate partial financial hardship.
Do I have a Partial Financial Hardship?
You are experiencing partial financial hardship if the amount of your loan payments under their original repayment plan is greater than 15% of your discretionary income. Your discretionary income is the difference between your adjusted gross income (AGI) and 150% of the federal poverty level (FPL).
| Annual AGI | Family size | 150% FPL for family of 2 | Annual discretionary income | 15% of Discretionary Income |
|---|---|---|---|---|
$30,000 |
2 |
$21,855 |
$8,145 | $1,221.75 |
Using this example, you would demonstrate partial financial hardship if you owed more than $1,221.75 annually ($101.81 monthly) upon entering repayment under a standard 10-year repayment plan.
How Do I Apply?
Contact your lender to request IBR. In addition to their paperwork, you’ll also be asked to complete an IRS Tax Form 4506-T. This form allows a lender to verify your income.
If you’re married and are filing a joint tax return, your spouse’s income may be taken into account when calculating your discretionary income. This is still being determined, though, so contact your lender to discuss how this may affect your required payment amount. If you’re married and are filing separate tax returns, only your income will be considered.
When applying for IBR, you’ll also need to certify your family size. Family size includes you, your spouse, dependent children (including children who will be born during the certification year), and/or other family members who live with you and receive more than 50% of their financial support from you.
What Happens if My Financial Situation Improves?
If your situation improves and you no longer display partial financial hardship, you can stay in an IBR plan. If you choose to do this, you will pay the maximum amount calculated by your lender when you entered IBR. Also, remember that you have to recertify your eligibility for a partial financial hardship annually. This means that your repayment amount could change annually as well.
Are There Any Changes to My Interest Rate?
Although payment amounts are reduced, interest will accrue normally. Just like other plans that extend repayment terms, IBR can add to the total cost of your loan. Under IBR, your monthly payments may be less than the amount of interest accrued that month. If you have a subsidized Stafford Loan, the U.S. Department of Education will subsidize the unpaid accruing interest for up to 3 years. However, all other loans (and subsidized loans after their 3-year subsidy) will accrue interest normally, and eventually such interest may be capitalized.
Will IBR Extend My Repayment Period?
Yes, there is no maximum repayment term for IBR, meaning you may pay more interest over the life of your loan.
However, IBR has a safety valve that most other repayment plans do not. If you have an outstanding balance after repaying your loan for 25 years and making 300 eligible payments, your remaining debt is discharged. Payments are eligible if they occur on or after July 1, 2009. You may prepay, but you will not be eligible for forgiveness until 25 years after you enter the plan. This means it is very possible that you will repay your loan in full before the necessary time passes.
Should I Choose an IBR Plan?
As with almost everything else in life, the decision to enter IBR depends on your situation. For additional help, you can contact an independent information resource, like one of the borrower information specialists at American Student Assistance® (ASA). Give us a call at 866.493.5563 to explore your options. We’re here to help.
