Income Based Repayment (IBR) for Student Loans
Note regarding changes due to COVID-19:
Changes were made to the federal student loans program as part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) which was adopted in Congress on 03/27/2020 to help those affected by the coronavirus.
Until January 31, 2022, borrowers have the option to suspend payments without penalty, if necessary. If you are looking for a discount through an income-based repayment plan, skipped payments will still count towards the time required to be eligible.
You can find out more in our guide to federal student loans.
If you are looking for a way to make your federal student loan payments more manageable, you should consider signing up for an income-based repayment plan.
An income-based repayment plan adjusts your monthly loan payment based on your current financial situation, taking into account your family size and your monthly income.
There are four different repayment plans based on income: REPAYE (Pay As You Earn Review), PAYE (Pay As You Earn), ICR (Income-Contingent Repayment) and IBR (Income-Based Repayment).
With the REPAYE and ICR plans, your monthly payment is based on your income, family size, and debt load (including your student loan amount), regardless of financial hardship.
With the 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 Reimbursement (IBR)?
IBR plans have been around since 2009. This federal student loan repayment plan from the US Department of Education caps your monthly student loan payments at ten% Where 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 last tax return.
Then you will look for the Federal Poverty Level (FPL) for your family size and multiply that number by 1.5. When you subtract this number from your adjusted gross income, you get your total discretionary income.
If your student loan debt is greater than your discretionary income, you should be eligible for IBR. There are actually two different versions of the IBR, both based on when you first took out your student loans.
Monthly payments via IBR
Once you qualify for an IBR plan, your monthly payments will be capped at ten% your discretionary income if you are a new borrower on or after July 1, 2014.
Through StudentAid.gov, “You are considered a new borrower as of July 1, 2014 if you had no outstanding balances on a Federal Direct Loan Program (Direct Loan) William D. Ford loan or a Federal Loan Program loan for Canada. family education (FFEL) when you received a direct loan on or after July 1, 2014. “
If you are not a new borrower as of July 1, 2014, your payments are generally capped at 15% of your discretionary income. However, no matter when you take out your loans, your monthly payments will never exceed what you would pay with 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 your family size may change, you will need to renew your certification each year, so your payments may go up or down over time.
Forgiveness through IBR
Borrowers who enroll in IBR plans are also eligible for waiver of their student loan. If your payment is capped at ten% of your discretionary income, any remaining loan balance will be canceled after 20 years. If you are qualified for the 15% ceiling, you will be entitled to forgiveness after 25 years. Your loan manager will track your eligible payments and notify you when you get closer to loan cancellation eligibility.
Any canceled loan balance will be treated as taxable income, so you may need to pay taxes on the amount depending on your tax situation.
>> Read more: When will I be taxed for canceling a student loan?
Am I eligible for the IBR?
To be eligible for IBR, your monthly loan payments must be less than what you would pay with 10 years or reimbursement via the standard reimbursement plan.
You must also demonstrate at least partial financial hardship, defined by the Department of Education as a “circumstance in which the annual amount owed on your eligible loans exceeds 15% 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 eligible loans:
If you have a Parent PLUS loan, you will not be eligible for IBR.
IBR vs other IDR plans
Since there are several types of income-driven repayment plans out there, it’s easy to go wrong. For example, many people use “IBR” and “IDR” interchangeably, but they are not the same thing.
Income-Based Repayment is the umbrella term used to refer to four different types of repayment options for federal student loans. IBR is one of those payment plans, but you can sign up for three other plans. Let’s take a look at how IBR compares to each of these plans.
IBR vs PAYE
Only existing since 2012, Pay As You Earn (PAYE) is one of the newer IDR plans. In many ways, it is similar to IBR, although less flexible.
PAYE caps your monthly payments at ten% of your discretionary income over a repayment period of 20 years. However, you must be a new borrower to qualify and demonstrate financial difficulty. You will only be eligible if you received a direct loan disbursement after October 1, 2011.
IBR vs. REFUND
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 ten% of your total discretionary income. Borrowers are eligible for a loan forgiveness after 20 years for undergraduate loans and 25 years for graduate loans.
However, you do not need to demonstrate financial need to be eligible for the REPAYMENT plans, and there is no deadline for when you take out your first loans.
IBR vs. ICR
Income Based Repayment (ICR) is the only IDR plan that accepts Parent PLUS loans. However, they must be consolidated in a Direct Loan. Like REPAYE, you do not need to demonstrate financial need to be eligible for ICR.
With ICR, you will pay either 20% your discretionary income or the amount you would pay under a 12-year fixed repayment plan.
What are the advantages 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. It could add a lot of wiggle room to your budget each month.
- Loan discount: IBR enrollment guarantees that your loans will be canceled after 20 to 25 years.
- Flexibility: If your situation suddenly changes, you can change your plan at any time. But if you stick with the IBR, you’ll never pay more than with a standard repayment plan, no matter how much your income increases.
What are the disadvantages of IBR?
10-year extension of payments 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 loan balance (if any) is written off.
You are also not completely off the hook once your loans are canceled. The government considers debt forgiveness taxable income, so you could end up with a hefty tax bill. Of course, both of these things can be worth it if you really can’t afford your current monthly payments.
You’ll also want to keep in mind that the IBR is only available for federal loans. If you have private student loans, you will need to look for other solutions to handle these payments.
Is IBR Right For You?
There are pros and cons to registering with the IBR. So how do you know if it’s right for you? Start by determining your discretionary income and what you can afford to pay each month.
If you can afford the standard repayment plan, this might be the best alternative as you will save a lot of money in interest by paying off your loans in fewer years. However, if you need the monthly savings IBR has to offer, this may be the right choice for you.
Make sure you understand the tax implications and how it will affect you. Twenty years from now it may seem like a long time, but few people appreciate a big or unexpected tax bill.
Remember that there are other options as well. For example, if you have both federal and private loans – and you have good credit and / or a willing, qualified co-signer – you may want to consider refinancing instead. Refinancing can be a good way to consolidate all of your loans into one lower monthly payment.
>> Read more: The Best Places to Refinance Student Loans
IBR is one of four income-based repayment plans offered by the Department of Education. One of the advantages of IBR is that you never have to worry about paying more than the standard repayment plan. Once you are registered with IBR, you have the freedom to switch to another plan at any time. Overall, IBR can give you the flexibility you need and a monthly payment amount that you can afford.