Income-Based Repayment (IBR) Plan

By davidgaoUpdated April 17, 2018


Overview

The Income-Based Repayment (IBR) plan is an income-driven repayment plan available to borrowers with loans made under the Federal Family Education Loan (FFEL) Program and/or Direct Loan Program. IBR is the only income-driven repayment plan available to FFEL borrowers (who do not wish to consolidate their loans into a Direct Consolidation Loan). Under IBR, participants pay at least 10 (new borrower on or after 6/1/14) or 15% of their discretionary income towards their student loans, but never more than the amount that would be paid under the Standard Plan. Any outstanding balance after 20 (new borrower) or 25 years of repayment is forgiven, though the amount forgiven is considered taxable income.

Eligibility

  • All Direct Loan and FFEL types except PLUS Loans made to parents and consolidation loans that repaid PLUS Loans made to parents
  • Required payment amount must be less than the amount owed under the Standard Plan (i.e. Partial Financial Hardship)
  • To remain eligible, borrowers must re-certify their income and household size every year

Terms

Monthly Payment
10% of Discretionary Income if New Borrower on or after 6/1/14
15% of Discretionary Income Otherwise

Discretionary income for IBR is defined as:

Adjusted Gross Income (AGI) – 150% of Poverty Rate (based on borrower’s state and household size)

If the borrower is married, his or her spouse’s income and debt will only be considered if he or she files a joint tax return.

Required Payment Minimum
None

Payments can be $0 if AGI is equal to or less than 150% of the Poverty Guideline Rate.

Required Payment Cap
Payments cannot exceed the amount paid under the 10-Year Standard Plan
Maximum Repayment Period
20 Years if New Borrower on or after 6/1/14
25 Years Otherwise
Loan Forgiveness
100% of the outstanding balance is forgiven after the maximum repayment period

The amount forgiven is considered taxable income.

Interest Benefit
If monthly payments do not cover the full amount of interest that accrues on subsidized loans, the government will pay the difference for the first three years.
Interest Capitalization
If payments do not cover the interest, outstanding interest is capitalized if the borrower ceases to have a financial hardship (i.e. forced to leave plan) or voluntarily leaves the plan. There is no limit to how much interest can be capitalized.
Switching Plans
Borrowers can only switch to a Standard Plan. Borrowers intending to pursue another plan must first make at least one payment under the Standard Plan or one payment under a reduced-payment forbearance.

Best For

  • FFEL borrowers with high debt relative to income
  • FFEL borrowers seeking Public Service Loan Forgiveness (PSLF)

Additional Notes

  • Because the repayment period is significantly longer under IBR than the Standard Plan, some borrowers may end up paying substantially more interest. However, borrowers are always able to pay more (up to the specified payment cap) than the minimum to achieve student debt freedom faster.
  • Borrowers who work in the non-profit or government sector (estimated to be about 25% of Americans) should strongly consider pursuing Public Service Loan Forgiveness (PSLF). With PSLF, borrowers under IBR will need to make just 10 years of qualifying payments. All outstanding balance will be forgiven, and the amount forgiven will not be considered taxable income.
  • If income increases significantly, it may be worthwhile for certain borrowers to consider refinancing their loans to get to a lower interest rate.

Relevant Articles

 

  • Benjamin Franklin

    An investment in knowledge pays the best interest.

    Benjamin Franklin
  • Pablo Picasso

    Action is the foundational key to all success.

    Pablo Picasso
  • Abraham Lincoln

    Let no feeling of discouragement prey upon you, and in the end you are sure to succeed.

    Abraham Lincoln