Income-Based Repayment (IBR) for Student Loans
Income-based repayment makes monthly student loan payments more manageable for borrowers, especially those facing financial difficulties. Read on to find out how it works.
Table of Contents
- What is Income-Based Repayment (IBR)
- Pros & Cons
- Eligibility Requirements
- How to Apply for IBR
- IBR and Loan Forgiveness
- IBR vs Other Income-Driven Plans
- Final Thoughts
Income-based repayment (IBR) plans were created by the federal government to solve the student debt crisis, proving to be an effective solution to managing student loan debt. As one of the four income-driven plan repayment plans, IBR plans target borrowers who are struggling to keep up with their payments due to having an income that is lower than their student debts. In this guide, we explain the ins and outs of IBR and how to make the most of all that it can offer you.
What is Income-Based Repayment (IBR)
Income-Based Repayment (IBR) plan at a glance
|Repayment Term||25 years|
|Number of Payments||120 payments / 10–15% of income|
|Monthly payment amount||10–15% discretionary income|
|Loan Types Applicable||Federal loans|
IBR is one of four federal repayment plans that falls under the umbrella of Income-Driven Repayment (IDR). The four plans under IDR are as follows: Revised Pay-As-You-Earn, Pay-As-You-Earn, IBR, and Income-Contingent Repayment. IBR bases your monthly loan payments on your discretionary income, which is the money left over after necessities and taxes. The IBR plan caps 10% of this income for new borrowers (on or after 2014) and 15% for old borrowers (before 2014).
Pros & Cons
Borrowers opt for the IBR plan for a number of reasons. Consider the following potential benefits and drawbacks of this plan.
The benefits of this plan include the following
Loan payments can be adjusted
The loan payments under IBR depend on how much you earn and the size of your family. These two elements may decrease your monthly loan payments, helping you to avoid defaulting even if you lose your job.
Longer repayment period
IBR has a longer loan term of 25 years, which ultimately reduces your monthly loan payments. Lower monthly payments open up room in your budget for you to channel your money elsewhere.
Student loans may be forgiven
Under IBR, borrowers are eligible for student loan forgiveness after having made 120 qualifying payments. Multiple forgiveness programs are available to students, including income-driven repayment forgiveness and Public Service Loan Forgiveness.
The potential drawbacks of IBR include the following
Principal loan may increase
By having a longer loan term, you may pay more on your loan over time due to accrued interest.
Must renew your application every year
The loan payment amount will not be consistent throughout the loan term. This is because each year, you have to submit a new application in order to confirm whether or not there have been changes to your income or family.
May pay income tax on the forgiven amount
Borrowers who receive loan forgiveness under the income-based repayment plan after 2025 may have to pay tax on the forgiven amount. This tax bill can make it harder for you to manage your student loan debt.
It’s important to be aware of the requirements involved in order to be eligible for IBR, so that you can make the best possible decision for your situation. Key factors affect your eligibility for IBR, including partial financial hardship and loan type.
Partial financial hardship (PFH)
To qualify for IBR, the payment you would make under the repayment plan must be less than the amount you would pay under the standard 10-year repayment plan. In order to show partial financial hardship, the discretionary income used to calculate your monthly payment is based on your adjusted gross income (yearly income after taxes), family size as well as the poverty guideline in your state.
To qualify for IBR, you must have federal student loans. We provide more detail in this regard below.
Loans that Qualify for IBR
It’s important to be aware of which federal student loans are eligible for the IBR plan. The reason being that the overall purpose of this plan is to help make student loan payments more manageable for graduates and reduce the risk of default, so it’s necessary to be aware of whether this plan applies to you. With this in mind, IBR targets graduates that have a low income and can only meet some of their needs while paying more than USD500 in monthly loan payments.
Federal student loans eligible for the IBR plan include:
- Direct subsidized and unsubsidized loans
- Direct PLUS Loans
- Direct Consolidation Loans
- Subsidized and unsubsidized FFEL Stafford Loans
- FFEL PLUS Loans
- FFEL Consolidation Loan
- Perkins loans
How to Apply for IBR
Once you’ve met the eligibility requirements, then you can move on to the application process.
Steps to Apply
To apply for IBR, you must submit an income-driven repayment form for each federal student loan. The application is available online at studentaid.gov. Make sure to update your application yearly to recertify your family size and income. Fail to do this, and your payment plan will revert to the standard ten-year repayment by default.
The following information and documentation that may be required include the following:
- Email address
- Phone number
- Mailing address
- Federal student aid (FSA) ID
- Tax return information
Your monthly loan payment will be calculated annually by your loan servicer under the income-based repayment plan. If you want to estimate your monthly loan payment under IBR, the following information is needed:
- Adjusted gross income
- Poverty guidelines for your state and family size
- The year you took out your student loans
- Discretionary income
To find your discretionary income, subtract 150% of the poverty guideline from your adjusted gross income. You will then determine your monthly payment by finding 10% (new borrowers) or 15% (old borrowers) of your discretionary come divided into 12 (months in a year). The number you get is considerably lower than the typical payment under the standard ten-year repayment plan. The standard repayment plan has a fixed payment throughout the loan term regardless of income.
IBR and Loan Forgiveness
Federal student loans qualify for forgiveness under IBR through various programs, including the Public Service Loan Forgiveness (PSLF) program. PSLF is aimed at graduates who work in the public sector. To qualify, you must be a full-time employee of a non-profit organization or government agency for ten years and have made 120 qualifying payments under IBR. The amount forgiven through PSLF is not taxable.
Borrowers also have the option of receiving loan forgiveness through income-based forgiveness. Under this program, direct student loans for undergraduates are forgiven after 240 qualifying payments, while graduates receive forgiveness on their direct or FFEL loans after 300 qualifying payments.
Other Considerations for IBR
With IBR, your loan payments may change every year based on the changes in your income. If your income remains unchanged but your family size increases, your monthly payments may reduce. However, if your income increases but there are no changes to the size of your family, you may be required to pay more. Also, it’s important to note that if you are on deferment or forbearance, switching to economic hardship deferment is essential in order for your application to be successful.
IBR vs Other Income-Driven Plans
Seeing as IBR is just one example of an income-driven repayment plan, here is how the other three repayment plans stack up in contrast.
|Repayment Plan||Eligible |
|Pay As You Earn (PAYE)||Direct student loans||10% of discretionary income. Based on loan amount, adjusted gross income and family size.||20 years|
|Revised Pay As You Earn (REPAYE)||Direct student loans||10% of discretionary income. Based on loan debt amount, adjusted gross income and family size||Min: 20 years|
Max: 25 years
|Income-Contingent Repayment Plan (ICR)||Direct student loans||20% of discretionary income. Based on family size, adjusted gross income adjusted and total direct loan balance||25 years|
Pay-As-You-Earn (PAYE) is one income repayment plan that allows borrowers to dedicate 10% of their discretionary income toward student loan payments. To be eligible, you must be a new borrower, have direct loans, and demonstrate partial financial hardship. Borrowers under PAYE qualify for loan forgiveness after making 240 qualifying payments. Parent PLUS and defaulted loans are not eligible for this repayment plan.
Revised-Pay-As-You-Earn (REPAYE) is another income-driven repayment that bases loan payments on 10% of discretionary income. REPAYE is the revised version of the PAYE, which eliminates specific eligibility requirements that apply to PAYE. Under REPAYE, all borrowers (both new and old) are eligible for the plan and are not required to demonstrate partial financial hardship. Similar to PAYE – only direct loans, excluding Parent PLUS and defaulted loans, are eligible for this repayment plan.
Income-Contingent (ICR) Repayment
This repayment plan bases monthly loan payments on 20% of discretionary income. The income-contingent (ICR) was the first income-driven repayment plan created. In order to qualify, you must have direct loans, with the exception of Parent PLUS and defaulted loans. Similar to the previous plan, ICR doesn’t require borrowers to demonstrate partial financial hardship. Loans under this plan are eligible for forgiveness after 300 qualifying payments and also qualify for the Public Sector Loan Forgiveness program.
Here are some frequently asked questions.
What is an IDR plan for student loans?
An income-driven repayment plan makes your monthly loan payment more manageable by basing the amount you pay on your discretionary income and family size. With income based-repayment, you will pay 10–15% of your income.
Is IBR a good idea?
Income-based repayment is ideal for low-income borrowers who are experiencing financial difficulties, cannot make their loan payment every month, have exhausted their deferment and forbearance options, and are at risk of defaulting.
What is the income limit for IBR?
The income limit for the income-based repayment plan is determined by your Adjusted Gross Income (AGI). Generally, your AGI should be 150% of the poverty level based on your family size and state.
IBR is a great solution for reducing high monthly loan payments. When conducting your research, pay attention to the eligible loans, the process of demonstrating partial financial hardship, what you need to apply, how to estimate monthly payments, loan forgiveness programs, alternative repayment plans, and tax implications. Are you applying? The information provided in this article will ensure that you have a smooth and successful process.