How does the Income-Based Repayment (IBR) plan work?
As the nation’s outstanding student loan debt swells to unprecedented levels, current students and graduates who are carrying a large balance should know about the Income-Based Repayment (IBR) plan. The IBR plan is a government-sponsored means of practically repaying one’s student loan debt. It works by limiting borrowers’ required payments to amounts that are manageable based on a percentage of their income. Additionally, the IBR plan grants complete student loan forgiveness to some students after 10 years of timely payments, and all students receive complete forgiveness after 25 years of timely payments.
In order to qualify for the IBR plan, students must have Stafford, PLUS, or Consolidation Loans made under either the Direct Loan or FFEL program. The loans must not be in default, they cannot be parent PLUS Loans (student loans taken out by parents of borrowers), or Consolidation Loans being repaid by parents.
How are Payments Calculated?
The IBR plan takes two main factors into consideration when determining how much an individual can afford on their college loan payments: income and family size.
An individual’s annual income is compared to their family size and a maximum monthly payment is derived from those two numbers. Refer to this chart, as hosted by the government’s Income-Based Repayment Plan page:
If a student loan borrower is married and the couple files a joint federal tax return, then the annual income considered for the IBR plan will be a total of both married persons’ annual income.
How Does the Loan Forgiveness Work?
There are two types of complete student loan forgiveness that are offered by the IBR plan: 10- and 25-year forgiveness opportunities.
The 10-year forgiveness is offered to borrowers who are employed in a public service career. Public service workers include the following, among many others:
- Military members
- Public Safety workers
- Law Enforcement
- Government Employees
- Certain Non-profit
The 25-year forgiveness is offered to all borrowers, regardless of the field they work in.
Both forgiveness opportunities require on-time and full monthly payments over the 10 or 25 year period.
Are There Any Disadvantages to the IBR Plan?
In order to reduce monthly payments to an amount based on an individual’s income and family size, the IBR program stretches the term of existing loans out. As a result, the amount of interest an individual will pay on loans under the IBR plan is often higher than it would be otherwise. Since Interest is paid on the balance of the remaining student loans with the IBR program, the quicker a borrower satisfies their loans, the less interest they will pay.
The IBR plan is also updated on a yearly basis, so borrowers who are a part of the IBR plan are required to submit annual documentation about their employment status. If a borrower finds a new, higher-paying job, they should expect to pay more towards their student loans the following year.