Income Based Repayment: Can It Work For You? | 05.20.11
If you’re like many students, then paying off your loans might be an overwhelming burden. This is when Income Based Repayment can help. In this blog I will outline what income based repayment is, who is eligible, and how to apply.
What is Income Based Repayment?
IBR is a repayment plan offered for most federal loans. The standard 10 year repayment plan calculates monthly payments based on the amount of your loans, but IBR is different because it is determined based on your income. If you have a high debt to income ratio, then IBR can help to lower your monthly payment amounts.
Who is Eligible for IBR?
IBR is available for all federal loans except for Parent PLUS, and Parent PLUS consolidation loans. Eligibility is determined by income, and family size. Below is a chart for determining monthly payments. The amounts shown are the maximums, and an individual’s monthly payment could potentially be lower.
| IBR Monthly Payment Amount | |||||||
|---|---|---|---|---|---|---|---|
| Annual Income |
Family Size | ||||||
| 1 | 2 | 3 | 4 | 5 | 6 | 7 | |
| $10,000 | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
| $15,000 | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
| $20,000 | $46 | $0 | $0 | $0 | $0 | $0 | $0 |
| $25,000 | $108 | $37 | $0 | $0 | $0 | $0 | $0 |
| $30,000 | $171 | $99 | $28 | $0 | $0 | $0 | $0 |
| $35,000 | $233 | $162 | $90 | $18 | $0 | $0 | $0 |
| $40,000 | $296 | $224 | $153 | $81 | $9 | $0 | $0 |
| $45,000 | $358 | $287 | $215 | $143 | $72 | $0 | $0 |
| $50,000 | $421 | $349 | $278 | $206 | $134 | $63 | $0 |
| $55,000 | $483 | $412 | $340 | $268 | $197 | $125 | $54 |
| $60,000 | $546 | $474 | $403 | $331 | $259 | $188 | $116 |
| $65,000 | $608 | $537 | $465 | $393 | $322 | $250 | $179 |
| $70,000 | $671 | $599 | $528 | $456 | $384 | $313 | $241 |
Source: U.S. Department of Education
If your IBR repayment amount is lower than if you were on the 10 year plan, then you are eligible. But if you notice the bottom left of the chart, numbers can start to get high. In these situations, a standard repayment plan would have lower monthly payments, and therefore, a person would be ineligible for IBR.
Benefits of IBR Plans
While some of the benefits are obvious (like lower monthly payments) others might not be. Here are some other perks you may not be aware of.
- Interest Payment- If your loan payments do not cover interest accrued, the government will pay any unpaid interest for up to 3 years.
- Cancellation- After 25 years of repayment, the remainder of the loan can be cancelled.
- Forgiveness- Like most federal loans, public service employees can have their loans forgiven after 120 consecutive payments (about 10 years).
Downsides of IBR
While IBR can initially seem like a great option, there are a couple of downsides I should mention. Because your monthly payments would be lower, the overall term of the loan would be longer. This is an issue because a longer term means more interest accruing, and therefore, you will pay more money in the long run.
Another downside is that IBR requires yearly documentation to be provided to your lender. Each year your loan is adjusted based on your income, so if you get a raise, this will be reflected in your monthly payments.
How to Apply for Income Based Repayment
To apply for income based repayment, you need to contact the servicer of your federal loan. For Direct loans, this would be the Department of Education’s Direct Loan Center. If you do not know who services your loan, go to www.nslds.ed.gov and complete a “financial aid review.”
If your loans are private student loans, you are not eligible for the federal IBR program, but if you are interested in lowering your monthly payments, you can look into Student Loan Consolidation.
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Watch out. I’ve been on IBR for a year and just found out that my interest for the past year has been capitalized. I’m not sure why as my payments cover my interest every month. Is this even legal? How can they charge me interest on interest when I’m paying the accrued interest every month?? I’m with Sallie Mae and am going to (A) Find another lender and (B) Start a letter-writing campaign. I’m paying 7.25% interest on a (now) $30,000 student loan, which started out at $21,000 when I left school, but capitalized to $39,000 due to forbearance during an ugly, drawn-out divorce, and I’ve been paying on it for 20 years. Our government at work!!!
@Debra – Capitalized interest is not uncommon for many student loans. Even federal loans capitalize interest in situations such as forbearance.Typically, when a loan is in a situation where interest accrues, when repayment kicks back in, the interest will be capitalized. To avoid this in the future, students can make interest-only payments which should not put your loan into repayment (double check with your lender), but can allow for capitalization to be avoided.
Wonderful blog. Thanks for posting this article. I appreciate your work.
Thanks
John Abraham
Thanks for the information. This will come in handy once I get ready to pay on my loans after graduation some time from now.