When the time comes for you to start repaying your federal student loans, you need to think about how to repay them. Usually, the US Department of Education enrolls every borrower for a standard repayment plan which might be quite expensive for those who are not earning more.
The income-based repayment plan which is one of the four types of Income-Driven Repayment Plan (IDR) can be helpful to those people because the monthly payment amounts will be based on their income and family size. It means that those who are earning less will be paying less, hence making it convenient for them to repay their debt.
List of Contents
- What is an Income-based repayment plan?
- Eligibility Criteria
- What is Discretionary Income?
- Loan Forgiveness and PSLF Program
- Advantages and Disadvantages of IDR Plan
- Comparison of Income-Based Repayment Plans with other IDR plans
- Application Process
What is an Income-Based Repayment Plan (IBR)?
An Income-Based Repayment Plan is a type of Income-Driven Repayment Plan (IDR) where you can make payments based on the income you earned and your family size. Your monthly payments will reduce because of this, hence making it more affordable to you especially if the amount of debt owed by you is more than the income earned.
Out of all the plans under Income-Driven Repayment Plan, IBR is the most complicated one to understand. If you have loans disbursed before July 1, 2014, then you will qualify for the old IBR which is not as attractive as the new one and you should consider other repayment plans. But if you have loans disbursed after July 1, 2014, then you qualify for the new IBR which is the best out of the other types of IDR Plan if-
You didn’t qualify for PAYE.
You don’t think that your income is going to increase much over time.
You have grad school debt.
You are married and you and your partner have incomes.
Comparison between old and new IBR
|Factors||Old IBR||New IBR|
|Repayment term||25 years||20 years|
|Amount of payment||15% of discretionary income||10% of discretionary income|
|Most suited for||FFLEP loan borrowers||Borrowers not qualifying for PAYE|
The payment amounts you make under IBR should be less than the amount you would be paying under a Standard Repayment Plan of 10 years.
The borrower must show 'partial financial hardship'.
The debt you owe should be more than your discretionary income.
You need to certify your income (showing a partial financial hardship) and family size. You need to recertify your income and family size every year as it is evaluated annually, also when your income or family size changes.
If you do not recertify your income and family size within the due date, then you would still be on the IBR plan but your monthly payments won’t be income-based and you would continue making payments as per the amounts under a Standard Repayment Period with a term of 10 years.
Let's say that the borrower has an AGI which is less than 150% of the poverty line established by the government, the payment under IBR will be zero (monthly). If the payment doesn't fulfill the interest on the loan, the federal government will pay up the unpaid interest which got acquired on a subsidized loan for up to three years, since the day IBR was opted for.
Eligible loans for IBR
Direct Subsidized and Unsubsidized Loans
Direct Grad PLUS Loans
Direct Consolidation Loans that did not repay any Parent PLUS Loans
Subsidized and Unsubsidized Federal Stafford Loans (Under FFEL Program)
FFEL Grad PLUS Loans
FFEL Consolidation Loans that did not repay any Parent PLUS Loans
It should be noted that borrowers of FFEL loans are eligible for only IBR plan out of the other types of Income-Driven Plans.
What is Discretionary Income?
The discretionary income of an individual is the amount of income left after deducting the necessary expenses like taxes, utilities, and food. So it is basically the amount you spend on non-essential things throughout the month.
But the US Department of Education looks at discretionary income as the amount of gross income (after tax) minus the poverty guidelines for your family size (in terms of student loans and income-driven plans).
Calculation of discretionary income
For most of the IDR plans, including the IBR plan, the discretionary income is calculated as the gross income minus 150% of poverty guidelines.
Your total salary is allowed to be kept by the Government up to 150% of poverty guidelines as they consider it to be essential as well as non-discretionary.
For example - You have a family size of 6 and earning a gross income of $60,000. The 2019 poverty guidelines as per 48 contiguous states and the District of Columbia for a family of 6 is $34,590. (Poverty guidelines for the state of Hawaii and Alaska are different)
So the discretionary income will be -
$60000 - (150% of $34590) = $60000 - $51885 = $8115.
[ Learn more about Discretionary Income]
Loan Forgiveness and PSLF Program
Any borrower who is enrolled in an income-based repayment plan will get the advantage of being eligible for either loan forgiveness or the Public Service Loan Forgiveness (PSLF) program.
Generally, if a borrower still has remaining balance to be paid after making qualifying monthly payments on-time, at the end of the repayment period (20 or 25 years), then this amount will be forgiven.
The total repayment period also includes the period of economic hardship deferment, the period where you were making payments under certain repayment plans and also the period where the amount of payment to be made is $0.
To know when the remaining amount will be qualified for forgiveness, you need to talk to your student loan servicer.
If you qualify for the PSLF program, then after making qualifying payments for 10 years the remaining balance will qualify for forgiveness.
[Learn more about Public Service Loan Forgiveness Programs ]
Advantages and Disadvantages of IDR Plan
The following points explain the advantages of IBR.
The monthly payments you are making will be based on your income. So if you earn less, you also have to pay less (10% or 15% of your discretionary income).
As compared to the amount of the monthly payment you make on a Standard Repayment Plan, the amount on an IBR plan will always be less.
Your income is reevaluated every year, so if your income goes down then the monthly payment amounts will also decrease.
After making qualifying payments for 20 or 25 years, if you have any remaining balance, then it will be forgiven. If eligible for the PSLF program, then the debt will be forgiven after 10 years.
Both graduate and undergraduate students can get themselves enrolled in the IBR plan.
You can choose other repayment plans if you want to pay off your loans faster.
The following points explain the disadvantages of IBR.
During periods when your income is really low, the payments you are making might not be enough to cover the interest amount. This interest will capitalize at the end of the repayment period which increases the amount to be paid.
The amount of the loan that is forgiven is chargeable to tax.
The interest amount you are paying over the repayment period (20 or 25 years) means that you are paying a higher amount than the amount you have to pay on a Standard Repayment Plan.
Reevaluation of income is done annually, so any increase in your income will gradually lead to an increase in the amount of the monthly payments also.
The plan is restricted to certain Federal loans only. Private loans are not eligible.
Comparison of Income-Based Repayment Plans with other IDR plans
Let’s compare the different types of income-driven plans to see which one you should go for and why.
1. IBR and PAYE - The new IBR and PAYE have almost the same features except that PAYE has a limit (10% of the loan balance) on the amount of interest to be capitalized while IBR doesn’t.
For example - If you have a loan of $5000 with an accrued interest of $1000, then under PAYE, only 10% of $5000, i.e $500 will be capitalized while on IBR, the whole $1000 will be capitalized.
So in this sense, PAYE is a better option and one can go for the IBR plan only if not qualified for PAYE.
2. New IBR and REPAYE - You can opt for IBR only if you show that you are facing partial financial hardship and you don’t expect your income to increase more in the later date.
The whole idea behind IBR is that the amount of the payments you are making should not be exceeding the amount you pay on a Standard Repayment Plan. So, if your income increases to the extent that your payment amount increases up to the amount paid under the Standard Repayment Plan or more, then you would be returning to the Standard Repayment Plan where any accrued interest which remains unpaid would be capitalized making the debt costlier.
If you don’t qualify for IBR plan because of high income, or you expect your income to increase in the later date, then it is better to opt for REPAYE. It also allows you to make monthly payments at an amount of 10% of your discretionary income but you do not need to show that you are facing partial financial hardship to qualify.
3. Old IBR and REPAYE - If you qualify for the old IBR and you have graduate loan debts, then the repayment period will be 25 years plus 5 more years. So, your loan will be forgiven only after 30 years.
REPAYE would be a better option in this case as the repayment term will be 25 years with grad loan debt and also subsidizes more interest on your loans as compared to IBR. It means that the remaining balance that would qualify for loan forgiveness will be lesser which is a good thing as this amount will be taxable.
4. IBR and Income-Contingent Repayment (ICR) Plan - If you have Parent PLUS loans, then you won’t be eligible for IBR or any other income-driven plans. ICR is the only plan which Parent PLUS loans are eligible for, even though they have to be consolidated first.
It also allows your loans to qualify for forgiveness after 25 years. The monthly payment amounts are determined as 20% of discretionary income or monthly payments when amortization of loans takes place, whichever is lesser. (Amortization means the reduction of the debt over a period of time)
5. Old IBR and other income-driven plans - If you have FFELP loans that means that you qualify only for the old IBR which is not a good option as compared to other income-driven plans.
Consolidation of these loans can be done so that they would qualify for other plans but it will reset the qualifying payments you’ve already made towards forgiveness if any. Do some more research to find out if this option would be beneficial and act accordingly.
[ Learn more about Student Loan Consolidation here ]
6.IBR and other income-driven plans - The way you file your tax returns will determine the amount of the monthly payments you make. In case you are married and -
If filing for returns separately - The payments you make are based only on your income.
If joint-filing of returns - The payments you make are based on your and your spouse’s income.
This option is not available in other plans. With IBR, you can reduce the amount of the monthly payments you make by filing your returns separately even if you’re married.
To apply for IBR, you need to take an application form called the Income-Driven Repayment Plan Request either from your loan servicer or apply for it online through the federal government website studentloans.gov. If you choose to take the form from your loan servicer, provide all the necessary details along with documentation as proof, if asked for, then sent it back to them through the mail.
You need to have the following before applying for the plan.
Federal Student Aid (FSA) ID. If you do not have one, you can create one by visiting studentaid.ed.gov.
Your personal information like address, email ID and phone number.
Your partner’s details, if you are married. Their signature is also needed in the application.
Your income information like a recently filed tax return, as proof of income.
If you to apply online, you have to follow the steps below-
Go to studentloans.gov and log in with your Financial Student Aid (FSA) ID.
Click on the Income-Driven Repayment Plan Request application form. Go through it to know what all details you need to provide and be ready with the documents as proof if asked for.
You can choose IBR from the list of other income-driven repayment plans. Note that you can change your repayment plan at any time if you want to.
Complete the application form by providing all the information that is asked for.
Irrespective of whether you applied online or submitted your loan paper application through mail along with any required documents, the time taken by your loan servicer to process your request might take a few weeks as they will need to acquire documents as proof of your income and family size.
It is clear now that even though IBR is a good plan to go for, it isn’t really for everyone. If you are earning very less and are not able to make payments as per the amounts under Standard Repayment Plan, then you can opt for IBR as it allows you to make smaller amounts of payment. But the repayment term is extended to 20 - 25 years which will increase the amount later on because of the accrued interest making you pay more in terms of interest.
Also, the loans that are forgiven will be chargeable to tax, which doesn’t really benefit you in a way.
So, make sure to do your research and understand these plans before enrolling in them, as it all depends upon the situation that you are facing. Consider factors like the amount of the loan, your income and if there are any other loan forgiveness alternatives that you can go for before signing up for the IBR plan.
How long does it take for Income-Based Repayment to process?
The loan servicer will take a few weeks to process your request for enrolling in an IBR plan as they will need to obtain your documents as proof of your income and family size.
How are Income-Based Repayment plans calculated?
If you have loans disbursed before July 1, 2014, then you qualify for the old IBR plan which is calculated as 15% of your discretionary income for a repayment period of 25 years.
If your loans are disbursed after July 1, 2014, then you qualify for the new IBR plan which is calculated as 10% of your discretionary income for a repayment period of 20 years.
Does filing jointly with the spouse affect Income-Based Repayment?
Yes, filing jointly with your spouse does affect IBR as the monthly payments you have to make will be based on both yours and your spouse’s income.
Do student loans get forgiven after 25 years?
Yes, if you opt for an income-driven repayment plan, then your loans are usually forgiven after 20-25 years. For graduate loans under IBR, it takes 30 years to be forgiven.
But do take note that the amount of the loan that is forgiven is chargeable to tax.
Which is better - Pay As You Earn (PAYE) or Income-Based Repayment (IBR)?
PAYE and IBR have similar features except that the amount of accrued interest that capitalizes on the PAYE plan is 10% of the remaining loan amount while in IBR the whole accrued interest will capitalize. So, taking this into consideration PAYE plan is better as compared to IBR as you have a lesser amount of accrued interest that capitalizes.
Does Income-Based Repayment affect credit score?
Even if you are enrolled in an IBR plan, you can still maintain high credit scores by making your debt payments on time, avoiding taking any additional credit and try to maintain your expenses to be able to pay off your debts faster.
Does Income-based repayment include spouse income?
If you are married and filing your returns jointly, then yes, the IBR plan will base your payments on both your and your spouse’s income.
Can I pay more on Income-Based Repayment?
As your income will be re-evaluated every year and, if at any period your income increases, then you have to pay more. But make sure that the amount you are paying does not exceed the amount that you would be paying on a Standard Repayment Plan, or else you won’t be eligible to further make payments under the IBR plan.
How long can you be enrolled in income based repayment plan?
If you have loans disbursed before July 1, 2014, then you qualify for the old IBR plan which has a repayment period of 25 years.
If your loans are disbursed after July 1, 2014, then you qualify for the new IBR plan which has a repayment period of 20 years.
How does loan forgiveness affect credit score?
If you have taken loans in good credit, then loan forgiveness will not impact your credit score. But if you have loans on default or under bad credit, then even if this amount is forgiven the lender does not need to remove your bad credit history from your credit report, hence, it takes a toll on your credit score.