High Student Loan Payments? Consider Income Based Repayment

If you’re struggling to pay off student loans, there’s something called Income Based Repayment (IBR for short) that you should know about.  If you’ve already heard of IBR and think that you don’t meet the criteria to lower your student loan payments, keep reading because some important changes have been added since July 1, 2010.

What is IBR?

Income Based Repayment is a repayment option for your federal student loans that lowers the amount you pay each month.  It does this by stretching out the term of your loan from the standard 10-year repayment option to a 25-year term for qualified borrowers.  For most people who enroll in IBR, their recalculated student loan payments will be less than 10% of their AGI (adjusted gross income – taxable income).

How Income Based Repayment Works

You can find out if you qualify for IBR with the Income Based Repayment Calculator.  This IBR calculator looks at your adjusted gross income and compares it to the your eligible student loans.  If you earn below 150% (1.5 times) of the poverty level, you won’t be required to make any payments for that year.  For those who make more than 1.5 times poverty level, their payments will be capped at 15%.   The majority of people will actually see IBR payments equal to 10% or less of their adjusted gross income.

Income Based Repayment Eligible Loans

Stafford Loans

Grad Plus

Perkins Loans (if consolidated into Direct Loan or FFEL)

(Parent Plus Loans and private loans are not eligible for IBR)

These charts are from the IBR website.  This chart shows the poverty level multiplied by 150%, giving borrowers an idea of the expected income level for IBR qualifiers.

This chart shows the percentage of AGI that can be expected as a payment if a borrower meets the income standards required by IBR.

Income Based Repayment Calculator

Be prepared to answer the following on the Income Based Repayment Calculator:

Are you married?

What is your federal student loan debt?

What is your spouse’s federal student loan debt?

What is your estimated income for this year? (you and spouse)

What is the interest rate on your federal student loans?

Do you live in Alaska or Hawaii?

Do you have dependents other than a spouse?

How to Apply for IBR

You will need to visit your lender’s website for the link to apply for Income Based Repayment.  If you have multiple providers for federal student loans, you can still qualify for IBR, but you will need to obtain all your loan information from the National Student Loan Data System and be prepared to tell each provider about other outstanding loans.

Proving Income to Lenders

You must show your lenders how much money you earn by filling out the IRS form 4506-T.  This will authorize the IRS to share your adjusted gross income with approved lenders – a requirement for IBR appliants.

Income Based Repayment Fixes

In 2010, two changes were made to the Income Based Repayment program that allows more people to qualify for lower payments.

Married Borrowers:  Rules now require lenders to factor in the income of both spouses as well as the total federal debt between the two.  This applies to couples that file their taxes jointly and results in a lower payment over previous years.

Baseline Debt: IBR is now calculated on the balance when the loan first entered repayment or current loan amount – whichever is greater. This allows the borrower to calculate the IBR payment on a figure that is closer to that which is actually owed.

IBR Loan Forgiveness

Any qualified student loan debt that remains after 25 years of Income Based Repayment, will be forgiven.  That is, if you use IBR to repay your loans, you are guaranteed to have no payments after 25 years.

Thoughts on Income Based Repayment

While I think the program is helpful for those in the short run, I think its not a long term solution to your student loan debt.  Maintaining student loan payments for 25 years is an extremely long time.  If someone actually uses the 25 year term of IBR, it means that their income hasn’t increased much higher than poverty level and the total interest paid could be much higher than if they would have kept a 10 year repayment plan.

I see the value for those who enter the workforce and earn slightly above minimum wage.  For these workers, IBR is an excellent tool that allows them to cover essential bills while they try to advance at work and increase their income.  But for those who can cut out all extras and focus on paying down debt, I think the IBR shouldn’t be considered the ‘end all’ for your student loans.

What are your thoughts?  Have you heard about IBR?  Would you consider using Income Based Repayment for student loans if you had trouble making the payments?