Income-Based Repayment (IBR) is a federal program created to keep monthly student loan payments affordable for borrowers with low incomes and large student loan balances. To qualify for Income-Based Repayment, borrowers need to show a partial financial hardship.
A partial financial hardship exists when the payment amount on the borrower’s student loans under a Standard (10-Year) Repayment Plan is greater than the amount the borrower would pay on the Income-Based Repayment Plan. Depending on fluctuations in a borrower’s income from year to year, the borrower’s payment amount could change annually.
If a borrower’s income increases to the level where a partial financial hardship no longer exists, the borrower may remain in the IBR plan. In these cases, the monthly payment will increase, but never exceed the amount required on the Standard (10-Year) Repayment Plan.
Loans Eligible for Income-Based Repayment
- Direct Subsidized Stafford Loans
- Direct Unsubsidized Stafford Loans
- Direct PLUS Loans for Graduate or Professional Students
- Direct Consolidation Loans (if the loan did not repay any Parent PLUS loans)
- Subsidized FFEL Stafford Loans
- Unsubsidized FFEL Stafford Loans
- FFEL PLUS Loans made to Graduate or Professional Students
- FFEL Consolidation Loans (if the loan did not repay any Parent PLUS loans)
Loans Ineligible for Income-Based Repayment
- Parent PLUS loans
- Consolidation Loans that repaid Parent PLUS loans
- Private loans
How IBR Payments are Calculated
Payments on IBR can increase or decrease annually based on changes to a borrower’s income. A borrower is required to recertify his or her income each year to maintain income-based payments.
IBR payments are based on the borrower’s discretionary income. Discretionary income is determined by the borrower’s Adjusted Gross Income (AGI) and the poverty guideline for his or her state.
ADJUSTED GROSS INCOME (AGI) – POVERTY GUIDELINE = DISCRETIONARY INCOME
The monthly payment amount under IBR will be equal to 15% of the borrower’s discretionary income. This is often more affordable than alternative repayment plans. The IBR payment will never be greater than the amount required on the Standard (10-Year) Repayment Plan.
15% of DISCRETIONARY INCOME = IBR PAYMENT
EXAMPLE: The following calculation shows how the IBR payment is determined for a borrower with a family size of 1 and an income of $35,000.
Adjusted Gross Income (AGI) – 150% of Poverty Guideline = Discretionary Income
$35,000 – $17,505* = $17,495 = Discretionary Income
15% x $17,495 = $2,624.25 = Annual IBR Payment
$2,624.25 ÷ 12 months = $219 = Monthly IBR Payment
*based on 2014 Federal Poverty Guidelines.
Additional Benefits of IBR
Beyond providing lower monthly payments, the Income-Based Repayment Plan offers a number of other benefits. While enrolled on IBR, borrowers with subsidized loans experience an interest payment benefit. For the first three years after enrolling on IBR, if a borrower’s IBR payment does not cover the monthly interest that accrues on the loan, the government will waive the unpaid interest on any subsidized loans.
For example, if a borrower’s monthly IBR payment is $50 and the loan accrues $100 in interest each month, the government will waive the $50 that accrues above the borrower’s monthly payment. This can help prevent the borrower’s balance from increasing for the first three years on IBR.
Furthermore, as long as the borrower can show partial financial hardship, interest that accrues while enrolled on IBR will not be capitalized. This can help limit the total cost of the loan.
The Income-Based Repayment Plan has a term of 25 years. If a borrower has a loan balance remaining after making 25 years of qualifying payments, that balance will be forgiven.
IBR for New Borrowers
For new* borrowers, IBR payments are calculated using 10 percent of the borrower’s discretionary income, with a repayment period of 20 years.
*To be considered a “new” borrower for IBR, you first started borrowing after July 1, 2014, or you had no outstanding federal student loan balance when you received a Direct Loan on or after July 1, 2014.
Estimate your Payment on IBR
This chart illustrates an estimate of your monthly payment under IBR. You can also use the Department of Education’s Repayment Estimator to calculate your payment on this program.
‘INCOME-BASED REPAYMENT’ PAYMENT CHART
Drawbacks of IBR
Since the borrower is making reduced monthly payments while on IBR, the total amount of interest the borrower will pay over the life of the loan may be greater than under the Standard (10-Year) Repayment Plan.
To maintain Income-Based payments, the borrower is required to submit annual documentation of income. If a borrower does not submit this documentation on time each year, the loan payment will revert back to the Standard (10-Year) payment amount, and any unpaid interest will be capitalized, increasing the total cost of the loan.
Borrowers who do receive loan forgiveness after 25 years on IBR may be required to pay income taxes on any forgiven balance. See the IRS website for more information about this topic.