Income Based Repayment
What is it?
- 25-year Loan repayment plan with loan forgiveness after 25 years of payments
- Not dependent on public service job
- Payment can go up as income goes up (certification of income required annually)
- All Federal Family Education Loans (FFELP) and Direct Loans are eligible so you don't have to consolidate (Perkins, BAR Loan, PLUS loans made to parents, Consolidation loans that include Parent PLUS loans, and private loans are not eligible)
- One of the best (if not the best) option if going into public service
- Partial Financial Hardship: To qualify for IBR, you must have a "partial financial hardship". If the monthly amount you would be required to pay under a Standard Repayment Plan (10 yrs) is higher than the monthly amount you would be required to repay under IBR you demonstrate partial financial hardship. You have a partial financial hardship if your monthly payment for the 10 year Standard Repayment Plan is more than 15% of your discretionary income. When determining the monthly payment for the 10 year Standard Repayment they use the current balance of your IBR-eligible loans or the balance of these loans at the start of repayment—whichever is larger. If you earn below 150% of poverty line for your state and family size, the required payment is zero.
- Eligibility is based on your Adjusted Gross Income (AGI) and family size, not the amount of loan debt that you have.
- Can use Alternative Documentation of Income Form if income changed substantially and tax return does not reflect current situation, or did not file.
- Max income to debt ratio is $120,000 loan debt vs. $126,722 income. Use www.ibrinfo.org or www.studentaid.ed.gov for online calculators to see if you qualify.
Loans Eligible for IBR:
- FFELP (with private entities) and Direct Loans (Department of Education) are eligible. Not for private, BAR, and Perkins Loans
- Consolidation loans with Perkins loans are eligible
- Perkins has its own cancellation/forgiveness options but most lawyers do not qualify. Go to www.studentloanborrowerassistance.org for details.
- Consolidation loans with Parent PLUS are not eligible
- Loans currently default are not eligible loans. Once out of default the loans are eligible again.
- Spouses must apply separately for IBR and for calculation of each spouses IBR payment
- Married borrowers that file taxes jointly have to use the joint AGI but can add spouses loan debt to the calculation
(Spouses loan debt not automatically placed loans in IBR. Spouse must apply for IBR separately. If filed taxes separately you cannot use spouse's loan debt in the calculation and you can loose some tax deductions (like child care credits, earned income credit, loan interest deductions). From a tax perspective, this can detrimental but from a student loan perspective, it can be beneficial. Family size is verified each year.)
- If have a past joint consolidation loan you must request IBR individually. The full amount of the joint consolidation loan is considered along with the joint AGI (Joint Consolidation is no longer available)
- Payment based on AGI and family size are reviewed annually
- Payments are capped at 15% of your disposable income
- Payment can go up or down based on financial situation
- Zero payment may be possible with potential negative amortization *
- Past payments made after July 1, 2009 under different repayment plans will count toward the 25 year forgiveness if applied for and received IBR
- Payments made under Direct Loan's Income Contingent Plan (ICR)** made any time before entering IBR count toward the 25 year forgiveness under IBR
- Only on time payments count toward Public Service Loan Forgiveness required 120 payments
- If income increases and no longer have partial financial hardship, can still stay in IBR
(Automatically required to pay under a 10 year Standard Repayment Plan based on the loan debt originally outstanding when began repayment under IBR. Will still qualify for forgiveness of any remaining balance at the end of 25 year payment period.)
- If there are significantly decreases before annually scheduled review of income can use alternative documentation proving new AGI, and IBR payment may be adjusted at any time.
- When your monthly payment (or zero payment) may not cover all the interest that accrues on your loans each month, this is called negative amortization
- The government will pay remaining unpaid interest due each month on your subsidized loans (including subsidized loans in consolidation) up to 3 consecutive years.
- For example, if monthly interest that accrues on subsidized loan is $40, but your IRB payment only covers $25 of this amount, the government will pay the remaining $15
- After 3 years, interest will compound/capitalize (negative amortization) on subsidized and all other loans. That means it will added to principal, but interest will continue to accrue only on the original principal amount. Anything owed after 25 years will be forgiven.
- Periods of economic hardship deferment are not included in 3 year period but periods of other deferment or forbearance are counted
(For example, if receive subsidy benefit for your 1st year under IBR, then receive an economic hardship deferment for 2 years, you still have 2 years of the subsidy benefit when economic hardship deferment ends)
(For example, if you return to school and receive an in-school deferment for 2 years following your 1st year of repayment under IBR, you will not have remaining eligibility for the interest subsidy benefit at the end of the in-school deferment)
**Income Contingent Repayment Plan (ICR) vs. Income Based Repayment (IBR):
- Less favorable repayment plan than IBR, implemented before IBR existed
- ICR is for Direct Loans only, IBR is available for Direct Loans and FFELP
- Loan debt taken into account in ICR but not in IBR, only income and family size
- ICR payments are generally higher than IBR, and sometimes higher than monthly payments under the 10 year standard payment plan
- Zero payment possible in ICR but without the 3 year subsidy benefit for IBR, you are responsible for all the interest that accrues on the loan even if have zero monthly payment
- Unpaid interest is capitalized annually in ICR, but in IBR only capitalized if you no longer have a partial hardship or leave IBR
- May pay more interest over the life of the loan due to long repayment period
- Negative amortization possible
- Can deduct interest paid on taxes just like on other repayment plans
Switching Repayment Plans OR Leaving IBR:
If you leave IBR and have unpaid interest, it will capitalize to principal, increasing loan debt. You will automatically be placed into the 10 year standard repayment plan for 1 monthly payment. After one month on the standard repayment plan you have the option to switch to another repayment plan (Extended, Graduated, etc). You cannot be forced out of IBR due to high income because the only criteria qualify is low income vs. high debt. Can stay in IBR but payments capped at the 10 year standard payment schedule based on original loan balance entered with. If you leave IBR you can come back if you demonstrate "partial financial hardship".
Applying for IBR:
- Contact your each lender/servicer to apply, check NSLDS to find out who is your loan servicer: www.nslds.ed.gov, Direct Loan only borrowers go to studentloans.gov.
- The process can take 4-6 weeks until all documentation is obtained
- Grace period still available for Stafford Subsidized & Unsubsidized Loans until make IBR payment
- Apply 2 months before end of your 6 month grace period to allow for processing
- If you cannot make payments while waiting for IBR to be processed you may request a deferment or forbearance. You will not be required to make any payments of principal. Interest will not accrue and will not be capitalized at the end of forbearance while waiting for IBR application to be processed by lender
- Servicer requires recent signed IRS tax forms and/or release form from you so that the can request it from IRS
- Affordable monthly payment (including $0)
- Loan debt cancelled after 25 years of repayment
- Generally payments will be less than 10% of income and even smaller for borrowers with low earnings.
- Can not be "kicked out" of IBR based on income
- IBR forgiveness option and Public Service Loan Forgiveness can save money. Lowest initial monthly payments.
- Possible to exclude spouse's income if you file taxes separately
- Government will pay unpaid interest on subsidized loan for up to 3 years.
- Loan Is an Entitlement
- Designed to work best for students with high debt to income ratios and participate in Public Service Loan Forgiveness and/or that stay in IBR over the entire 25 years
- Negative Amortization: You may pay more in the long run due to accumulated unpaid interest from paying less per month. Increased interest will accrue and may incur negative amortization. This increases your total borrowing costs.
- If you no longer meet the definition of partial financial hardship or end your participation in the plan any unpaid interest that has accumulated would be capitalized (added to balance), but can still stay in IBR and payments capped at the Standard Repayment Plan of 10 years
- If married you may want to file separate taxes so you not to loose the student loan incentives.
- Forgiven amount after 25 years or if pull out of program before 25 years is taxable.
- Monthly payment may change each year.
- Amount forgiven thru IBR counts as taxable income (but not taxable with Public Service Forgiveness). Issue only when do not stay in IBR. This is currently under legislation, and may not be applicable.