More than 45 million borrowers in the U.S. collectively owe an estimated $1.5 trillion in student loan debt today and that number has continually risen over the last several years with the rising cost of attendance.
When graduation comes, repaying a substantial amount of student loan debt can feel like a burden. Some students find it difficult to find a job that pays a high enough salary right out of college to cover the required payments, particularly with the standard repayment plan of ten years for federal student loans.
Fortunately, there are several income-driven repayment plans available that limit required monthly payments based on borrowers’ income, helping them avoid default.
The Income-Based Repayment Plan, also known as IBR, is one of the most common programs available for borrowers with federal student loan debt. This plan can help those who have an uncertain financial future. You can use the IBR calculator below to see what your new monthly payment will be as well as how it will affect your total loan cost.
How to Use This Student Loan Income-Based Repayment Calculator
With the IBR calculator below, you simply enter your information to calculate what your new payment will be and the total loan cost. This includes your state of residence, your family size, and details about your adjusted gross income and anticipated growth rate of your income if known.
An estimate for income may also be used, but it is important to note that the calculator results are based heavily on these inputs. You will also need to provide information about when your federal student loans were disbursed, the current balance of those loans, and the average interest rate across all loans. You can gather all of these details from your current student loan servicer.
Once you’ve completed the data entry, the calculator populates your new potential IBR payment. You will also see how that compares to your current plan and any savings you may see when making the switch.
The calculator also generates how much more you will pay on your loans by switching to an income-based option, as well as the potential amount of forgiveness, should you qualify in the future. Each of these details should drive your decision on whether or not to pursue income-based repayment for your federal student loans.
What is the Income-Based Repayment Plan?
Although the federal government offers several income-driven repayment plans for borrowers, the Income-Based Repayment Plan is one of the most popular.
The plan allows student loan borrowers to cap their monthly student loan payments at 10 percent of their discretionary income. For borrowers who already had federal student loans prior to July 1, 2014, monthly payments under IBR are capped at 15 percent of discretionary income. In either case, the payment cannot be more than what the minimum payment would be under a Standard 10-year Repayment Plan.
Additionally, borrowers are able to lower their monthly payments because the repayment term is extended well beyond the standard 10-year plan. You may have 20 or 25 years to repay your loans under IBR, and the remaining loan balance is forgiven at that time, so long as you remain on-time with your payments throughout the plan.
Although switching to the IBR Plan is not a fool-proof method for staying on track with student loan payments, the move does help borrowers who are struggling to keep up with higher monthly loan minimums. You can stay on IBR for as long as you want.
Using the calculator above, we can see how the Income-Based Repayment Plan can help a borrower who needs some relief from monthly student loan payments.
An individual who is a Washingnton D.C. resident with a one-member family, adjusted gross income of $50,000, and $50,000 in student loan debt could reduce their monthly payment by $162 with IBR. This assumes a growth rate on income of 3.5%, an average weighted interest rate of 6.5%, and disbursement of loans that took place before 2014. Lowering the borrower’s current payment of $561 down to $399 can help improve their monthly cash flow.
Pros & Cons of IBR
There are several advantages to using the Income-Based Repayment Plan. First, the monthly payments are calculated based on your discretionary income, so borrowers who cannot afford their monthly loan payments do not have to pay or can pay very little without defaulting.
Additionally, the monthly savings can be significant for those with lower incomes or high federal student loan balances. There is also the potential for loan forgiveness on any remaining balance after 20 or 25 years of payments.
However, there are downsides to IBR as well. As your income rises, so may your student loan payments under an IBR Plan. Borrowers must recertify their income based on tax returns each year, and if there is a jump in pay, monthly payments under IBR can be high (though no higher than they would be under the standard plan).
Also, over time, borrowers who utilize IBR may not be paying off any of the principal on their loan balances. This could lead to a substantial amount forgiven in the future, but this is a taxable event for most borrowers. Also, the total cost of borrowing is higher under IBR plans because the repayment term is extended.
The Department of Education offers the Income-Based Repayment Plan to borrowers who are in good standing with their federal student loans. The plans are meant to provide some respite for borrowers who have a low income, a high student loan balance, or a combination of the two.
While IBR can lower your monthly payment initially, the total cost of repayment increase given the minimal principal payments and extended repayment term. Borrowers need to consider their potential to earn more in the future, and how higher income will impact their IBR Plan.
Overall, income-based repayment helps those who need some assistance staying current with their student loan payments. Before making the decision to move to IBR, be sure to consider how it compares to your current repayment plan and its pros and cons. Also, be sure to look into the other income-driven repayment plans such as Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR).
Author: Melissa Horton
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