Income-Based Repayment

Income-Based Repayment (IBR) is a new repayment option for federal student loans. IBR can help make your student loan payments more manageable by determining your payment amount based on your income and family size.

Eligibility
You may be eligible for IBR if your federal student loan debt is high relative to your income and family size. Your lender will determine your eligibility, but you can use an IBR calculator to see if you may benefit from this repayment plan.

Federal student loans (made under either the Direct Loan or FFEL program) that are eligible to be repaid under an IBR plan include:

• Stafford loans
• Grad PLUS loans
• Consolidation loans

Loans that are not eligible include:

• Loans that are currently in default
• Parent PLUS loans
• Consolidation loans that repaid a Parent PLUS loan
• Perkins loans (unless included in a consolidation loan)
• Private student loans
• State loans

Payment Amount
IBR caps monthly payments at 15 percent of the difference between Adjusted Gross Income (AGI) and 150 percent of the Department of Health and Human Services poverty line that corresponds to your family size. That amount is then divided by 12 to get the monthly IBR repayment amount. The formula is as follows:

Monthly payments are calculated as 1/12th of:
15% x [AGI – (150% poverty line applicable to family size)]

AGI is your adjusted gross income as reported to the Internal Revenue Service (IRS). If you are married and filed jointly, then your AGI includes both your and your spouse’s income. If you are married but filed separately, then your AGI includes only your income.

Family size is determined by counting you (the borrower), your spouse, and your children (if they receive more than half of their support from you). Family size also includes other individuals who live with you and receive more than half of their support from you and will continue to receive support for the year the family size is certified. Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, and payment of college costs.

Pros and Cons
Income-Based Repayment has benefits as well as disadvantages. You should weigh the pros and cons and make the best decision for your situation.

The benefits of IBR include:

• Lower monthly payments – IBR monthly payment amount is less than the monthly payment amount under the standard 10-year repayment plan.
• Paid interest – If your IBR payment does not cover the interest on your loans, the government will pay your unpaid interest on subsidized Stafford loans for your first three years in IBR.
• 25-year balance cancellation – If you repay under the IBR plan for 25 years and meet other requirements, any remaining balance will be cancelled.
• 10-year Public Service Loan Forgiveness Program – If you work in a public service job and have Direct Loans, then your remaining loan balance could be cancelled after 10 years. Read more about the Public Service Loan Forgiveness Program.

The disadvantages of IBR include:

• Longer repayment period – A reduced payment in IBR usually extends your repayment period.
• Increased interest payment – An extended repayment period causes you to pay more total interest over the life of the loan.
• Annual documentation – You have to submit updated information about your income and family size each year or your payment reverts to the standard 10-year repayment amount.

For more information about this repayment option, visit ibrinfo.org. To apply for IBR, contact the lender or lenders who hold your student loans.

Posted: 7/8/2009