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Note about changes due to COVID-19:
There have been changes to the federal student loan program as a part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that passed in Congress on 3/27/2020 to help those affected by the Coronavirus.
Until 1/31/2021, borrowers have the option to suspend payments without penalty, if needed. If you are pursuing forgiveness through an income-driven repayment plan, skipped payments will still count towards the time required to be eligible.
You can learn more in our federal student loans guide.
If you’re looking for a way to make your federal student loan payments more manageable, then you should consider enrolling in an income-driven repayment plan.
An income-driven repayment plan adjusts your monthly loan payment based on your current financial situation, taking into account your family size and monthly income.
There are four different income-driven repayment plans: REPAYE (Revised Pay As You Earn), PAYE (Pay As You Earn), ICR (Income-Contingent Repayment), and IBR (Income-Based Repayment).
With REPAYE and ICR plans, your monthly payment is based on your income, family size, and debt load (including your student loan amounts), regardless of financial hardship.
With PAYE and IBR plans, your payment is based on the same factors, but the borrower must demonstrate at least partial financial hardship.
In this guide:
- What Is Income-Based Repayment (IBR)?
- IBR vs. Other IDR Plans
- What Are the Pros of IBR?
- What Are the Cons of IBR?
- Is IBR Right For You?
What Is Income-Based Repayment (IBR)?
IBR plans have been around since 2009. This federal student loan repayment plan from the U.S. Department of Education caps your monthly student loan payments at 10% or 15% of your discretionary income, depending on when you became a “new” borrower.
To calculate your discretionary income, you’ll start by finding your adjusted gross income on your most recent tax return.
Then you’ll look up the Federal Poverty Level (FPL) for your family size and multiply that number by 1.5. When you subtract that number from your adjusted gross income, you have your total discretionary income.
If your student loan debt is higher than your discretionary income, you should qualify for IBR. There are actually two different versions of IBR available, both of which are based on when you first took out your student loans.
Monthly Payments Through IBR
Once you qualify for an IBR plan, your monthly payments will be capped at 10% of your discretionary income if you’re a new borrower on or after July 1, 2014.
Per StudentAid.gov, “You’re considered a new borrower on or after July 1, 2014, if you had no outstanding balance on a William D. Ford Federal Direct Loan (Direct Loan) Program loan or Federal Family Education Loan (FFEL) Program loan when you received a Direct Loan on or after July 1, 2014.”
If you’re not a new loan borrower on or after July 1, 2014, then your payments are generally capped at 15% of your discretionary income. Regardless of when your loans are taken out, however, your monthly payments will never exceed what you’d pay under a standard 10-year repayment term.
You can estimate your monthly payment under an IBR plan by visiting our IBR calculator. Because your income or family size may change, you’ll be required to re-certify every year, so your payments may go up or down over time.
Forgiveness Through IBR
Borrowers who enroll in IBR plans are also eligible for student loan forgiveness. If your payment is capped at 10% of your discretionary income, any remaining loan balance will be forgiven after 20 years. If you qualified for the 15% cap, you will be eligible for forgiveness after 25 years. Your loan servicer will track your qualifying payments and notify you when you get close to qualifying for loan forgiveness.
Any forgiven loan balance will be treated as taxable income, so you may have to pay income taxes on the amount depending on your tax situation.
>> Read More: When Will I Get Taxed for Student Loan Forgiveness?
Am I Eligible for IBR?
To qualify for IBR, your monthly loan payments must be lower than what you would pay with 10 years or repayment through the standard repayment plan.
You also need to demonstrate at least a partial financial hardship, defined by the Department of Education as a “circumstance in which the annual amount due on your eligible loans, exceeds 15% of the difference between your adjusted gross income (AGI) and 150% of the poverty line for your family size in the state where you live.”
However, not all federal student loans are eligible for IBR. Here are the loans that do qualify:
- Direct Loans
- Graduate PLUS Loans
- Direct Consolidation Loans
- Federal Perkins Loans, if consolidated
- FFEL Consolidation Loans
If you have a Parent PLUS loan, you won’t be eligible for IBR.
IBR vs. Other IDR Plans
Because there are several types of income-driven repayment plans, it’s easy to get confused. For instance, many people use “IBR” and “IDR” interchangeably, but they aren’t the same thing.
Income-driven repayment is the umbrella term used to refer to four different kinds of repayment options for federal student loans. IBR is one of those payment plans but there are three other plans you can enroll in. Let’s look at how IBR stacks up against each of those plans.
IBR vs. PAYE
Having only been around since 2012, Pay As You Earn (PAYE) is one of the newer IDR plans. In many ways, it’s similar to IBR, although less flexible.
PAYE caps your monthly payments at 10% of your discretionary income over a repayment period of 20 years. However, you must be a new borrower to qualify and must demonstrate financial hardship. You’ll only qualify if you’ve received a Direct Loan disbursement after Oct. 1, 2011.
IBR vs. REPAYE
Revised Pay As You Earn (REPAYE) has only been available since 2015, making it the newest IDR plan available. REPAYE caps your monthly payments at 10% of your total discretionary income. Borrowers are eligible for loan forgiveness after 20 years for undergraduate loans and 25 years for graduate loans.
However, you don’t have to demonstrate financial need to qualify for REPAYE plans, and there isn’t a cutoff date for when you took out your first loans.
IBR vs. ICR
Income-contingent repayment (ICR) is the only IDR plan that accepts Parent PLUS Loans. However, they must be consolidated into a Direct Loan. Like REPAYE, you don’t have to demonstrate financial need to qualify for ICR.
With ICR, you’ll either pay 20% of your discretionary income or the amount you would pay under a fixed 12-year repayment plan.
What Are the Pros of IBR?
If you’re struggling to make your monthly student loan payments, IBR might be an option for you. Here are some of the benefits you can expect:
- Affordable payments: Depending on your discretionary income, enrolling in IBR could lower your monthly payments by hundreds of dollars. That could add a lot of breathing room to your budget every month.
- Loan forgiveness: Enrolling in IBR ensures your loans will be forgiven after 20 to 25 years.
- Flexibility: If your situation suddenly changes, you have the option to switch plans at any time. But if you stick with IBR, you’ll never pay more than you would on a Standard Repayment Plan, no matter how much your income increases.
What Are the Cons of IBR?
Extending 10 years of payments to up to 25 years means you’ll pay less money each month but more over the life of your loan. In fact, you could end up paying thousands of dollars in additional interest by the time your remaining loan balance (if any) is forgiven.
You’re not entirely off the hook once your loans are forgiven, either. The government considers forgiven debt taxable income so you could find yourself with a hefty tax bill. Of course, both of these things may be worth it if you truly can’t afford your current monthly payments.
You’ll also want to keep in mind that IBR is only available for federal loans. If you have private student loans, you’ll have to look into other solutions to manage those payments.
Is IBR Right For You?
There are advantages and disadvantages to enrolling in IBR. So, how do you know whether it’s right for you? Start by figuring out your discretionary income and what you can afford to pay each month.
If you can afford the Standard Repayment Plan, that might be the better alternative since you’ll save yourself a lot of money in interest by paying your loans off in less years. However, if you need the monthly savings that IBR can provide, it may be the right choice for you.
Make sure you understand the tax implications and how it will affect you. Twenty years may seem like a long time from now, but few people appreciate a large or unexpected tax bill.
Keep in mind that there are other options available, too. For instance, if you have both federal and private loans — and have good credit and/or a willing and qualified cosigner — you may look into refinancing instead. Refinancing can be a good way to consolidate all your loans into a single lower monthly payment.
>> Read More: Best Places to Refinance Student Loans
IBR is one of four income-driven repayment plans offered by the Department of Education. One of the benefits of IBR is you never have to worry about paying more than the Standard Repayment Plan. Once you’re enrolled in IBR, you have the freedom to switch to a different plan at any time. Overall, IBR might provide you with the flexibility you need and a monthly payment amount you can afford.
Author: Jamie Johnson