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Student Loan IBR Income Based Repayment Plans

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Graduation CakeA few weeks ago I asked newsletter subscribers to email me with the things that concerned them. Many readers told me that the cost of higher education, specifically the college and university level, and their student loans were some of the things on their mind.

A few years ago, I wrote about how my sister took advantage of a student loan forgiveness program for teachers. It’s a great program if you can participate because it helps the (former) student and it helps society as a whole by putting incentives and compensation more in line with the work performed. Today, I wanted to discuss the Income-based Repayment plan created by the College Cost Reduction and Access Act of 2007. It only became available/effective on July 1 of 2009.

What Is Income Based Repayment?

Income based repayment, IBR, is a system where monthly payments to federal student loans, such as Stafford, Grad Plus and consolidation loans (but not Perkins or Parent PLUS loans); are capped at 15% of your monthly discretionary income. Discretionary income is defined as the difference between your adjusted gross income (AGI) from the prior year and 150% of the federal poverty line for your family and state.

Calculating discretionary income: Let’s say you are in a family of 1 (single), you live in the 48 contiguous states, and your adjusted gross income is $40,000 a year. According to the 2009 poverty guidelines, the guideline is $10,830. You subtract $16,245 (150% of the guideline) from $40,000 to arrive at $23,755. 15% of $23,755 is $3,563.25, or $296.94 per month.

What if your income changes significantly? Since the equation uses last year’s AGI, your income this year might be lower because you lost your job or took a pay cut. Obtain an OMB approved IBR Plan Alternative Documentation of Income form from your lender for a more accurate calculation.

Who Qualifies?

There are no other qualification rules outside of the types of loans and your income. As long as you have a Stafford, Grad PLUS, or federal consolidation loan then you qualify. Perkins Loans are not included but if you have Perkins Loans consolidated into a federal consolidation loan, then it qualifies. Parent PLUS loans do not qualify.

Here’s a table from the Federal Student Aid website showing example payment amounts compared to family size and annual income, to give you an idea of whether IBR is right for you:

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 $47 $0 $0 $0 $0 $0 $0
$25,000 $109 $39 $0 $0 $0 $0 $0
$30,000 $172 $102 $32 $0 $0 $0 $0
$35,000 $234 $164 $94 $24 $0 $0 $0
$40,000 $297 $227 $157 $87 $16 $0 $0
$45,000 $359 $289 $219 $149 $79 $9 $0
$50,000 $422 $352 $282 $212 $141 $71 $1
$55,000 $484 $414 $344 $274 $204 $134 $64
$60,000 $547 $477 $407 $337 $266 $196 $126
$65,000 $609 $539 $469 $399 $329 $259 $189
$70,000 $672 $602 $532 $462 $391 $321 $251


Unpaid Interest Waived

Your IBR calculated payment may be less than the interest that accrues on your loan. With subsidized Stafford loans, the extra interest is waived for the first three years of income-based repayment. On other loans, and Stafford loans after three years, the interest is still accrued and capitalized on a status change. You can always pay more than the IBR minimum payment.

Loan Forgiveness After 25 Years

You would think that the lowered payments would simply mean you’re paying longer, but the bill has provisions that forgive the debt after 25 years. After 25 years of payments, even if you haven’t fully paid off the debt, the loan is forgiven and the debt is discharged. The discharged amount will be considered as taxable income in the year it’s discharged, as is common with forgiven loans.

Are There Disadvantages?

Yes.

  • You will pay more in interest. Since your payments are capped, you will accrue more interest on your loan as the year pass, especially if your payment is less than the interest each month.
  • More documentation each year. Since the payment is based on your income, you’ll have to reset the payment amount each year and file documentation showing your much you earned and your family size.

How to Apply?

If you’re thinking about IBR and wondering how you can participate in the program, talk to your current lender.

That’s income-based repayment for student loans in a nutshell. While this program seems like it’s a benefit to students, it actually hurts future students. If the price of college is too high, the market should react by demanding less college (fewer students choosing to attend). By having this program, with the government taking on part of the burden, we’ve inflated demand because families will have to pay less in the long run. The economics of the situation sure are ugly, huh?

(photo by CarbonNYC)

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20 Responses to “Student Loan IBR Income Based Repayment Plans”

  1. Anthony says:

    Oops, you have a typo: “28 contiguous states”.

    Also, is the 25-year loan forgiveness only available after you’ve applied for this IBR program?

    • zapeta says:

      From the info I found:

      “The Department of Education has indicated that the following types of payments will count towards IBR’s 25-year forgiveness period, as long as you are in IBR at some point during those 25 years:

      * Payments made in the Income Contingent Repayment plan (ICR) before July 1, 2009.
      * All payments made on or after July 1, 2009 in the IBR, ICR, and Standard (10-year) Repayment plans.
      * Periods when the borrower has a calculated payment of zero in IBR or ICR (this occurs when your income is at or below 150% of the poverty level for your family size).
      * Periods on or after July 1, 2009, when the borrower has been granted an economic hardship deferment.”

      So yes, you’d have to be in IBR for at least some part of the 25 year period.

  2. zapeta says:

    As an additional note, there is some legislation pending that will change the law so that loan amounts forgiven under the 25 year forgiveness period will not count as taxable income.

    Also, as your income rises, your payment will never exceed whatever the standard 10 year payment amount for your loan amount would be. So if you get in to IBR you can reduce your payment if your income is low, and it will only rise to the 10 year payment amount at most.

    Finally, there is a 10 year Public Service Loan Forgiveness program available if you’re in IBR. To qualify you have to be full time (>30 hours a week) employed at a local, tribal, state, or federal government, or a 501(c)(3) nonprofit. Your loans have to be in Direct Loans (William D. Ford Direct Loan Program), and you have to make 120 payments in IBR, ICR, or the 10 year standard payment plan. The 120 payments do not have to be consecutive, and the forgiven amount does not count as taxable income.

    • Troy says:

      It has yet to be determined if the 10 year forgiveness for public service will be taxable or not. As Professor of law at Georgetown, Philip Shrag points out, because the IBR is a consolidation of loans made after school there is a chance that the IRS will consider the forgiven debt as taxable income. May not want to give out advice not to plan for the taxation, as it could mean a bankruptcy filing after 10 years of paying 15% of your income.

  3. daemondust says:

    This is going to be more and more important. Come December we’re going to have (a few) people graduating and finding it almost impossible to find a well paying job. May(ish) will come and an entire graduating class will find the same. Six months later, that first loan payment comes due, whether they have a job or not.

    I’m currently paying around 10-15% of my take-home pay to get rid of my (small by most standards) loans as quickly as possible. But I’m lucky to be able to that. I know many people who graduated with me who are barely scraping by.

  4. Michael says:

    I question if the IBR will be around in 25 years? This isn’t a permanent change, right? I would just be concerned that someone would be making minimum payments, having the loan grow and then find out in 10 or 20 years that the forgiveness actually won’t happen and they have a bigger loan to deal with. I have worked my loans down to $75,000 dollars from $100,000. I only pay 1.625% on them but I still make extra payments because nothing in life is guaranteed and I will feel a lot better once I have paid it off. I also feel some obligation to pay the full amount. It was a great honor to be allowed to borrow this money and get an education that I would not have had access to otherwise and I feel that it’s my responsibility to pay the full amount as soon as possible so that someone else can follow in my footsteps and borrow the money and better themselves.

    • zapeta says:

      Since IBR was created by the law (the College Cost Reduction and Access Act of 2007) it would be around unless the law is changed. Given the high numbers of students with ever-increasing student loan debt at graduation and the current job situation I wouldn’t expect it to change anytime soon but there are never any guarantees. Even if the loan forgiveness disappears, IBR can be one option to allow borrowers to make payments that they can afford.

  5. I could have a $0 payment under IBR for two of my loans, but I can’t switch to it because you can only change your payment plan once per year, and I “changed” my payment plan by signing up for a certain one when I graduated in February. $165 per month on those loans for me!

    • zapeta says:

      Ugh, that’s stupid. They make you choose a plan when you graduate, that shouldn’t count as a switch! I wonder if it makes a difference if you’re in the Direct Loan program or if you have a private loan company that holds your loans, or if that’s a rule for all loans.

  6. Anonymous says:

    just wanna say thanks for the post! going to forward it to my mom (although I am 26…..) she always wants to “take a look” at things. Im a single mom of two boys under age 4, going to school fulltime for nursing, attempting to work on top of it and take care of my kids and myself properly. I was losing hours at work because of summer season ending and was in a panic as what to do. I had not considered the option that I had qualified for more then I took out on my loans. but I was hesitant, because I didn’t want to end up paying 200 a month once i had to start repaying my loan. That is when I discovered the IBR. Which is perfect for me because I can not work, have the money cover my expenses, have more time to study and spend with my boys, and less stress on me. no matter how high my income goes, the repayment amount is affordable.
    ANYWAY!!! lol… mind if i put this as a link on my blog?

  7. Alex says:

    This will definitely help me. I have a VERY high balance with chase for consolidated loans with a 30 yr plan. My payment will be reduced by almost 50%.

  8. IPS says:

    So… I think an IBR plan may help my husband and I manage our loan payments better. But, do we come up with a combined adjusted gross income (we both work) and and combined number for the loan payments? My student loan pmnt is pretty low, his is quite high; do we add those two amounts together?

    • IPS says:

      I should have done more research before leaving my question. I found another site with LOTS of detailed IBR info and calculators.

  9. zapeta says:

    The great news is that if the policies that President Obama advocated in the State of the Union address are passed, IBR payments will be limited to 10% of income over 150% of the poverty level. IBR payments are currently 15% of income over 150% of the poverty level. This will reduce payments by a third! In addition, he proposed that loans will be forgiven after 20 years instead of 25. I’m hoping these proposals pass soon!

  10. Riley says:

    How do I change from a Sallie Mae loan to a direct. I work for a state governemnt government, but have loans with Sallie rather than Direct Loans.

  11. ann says:

    Hi, All! I was checking into some payment plan options online when I ran into this site. Yay (=. I have a question. If my payment under the IBR plan or even the ICR plan comes to $0.00, but I am able to send something in as payment, would that disqualify me from this plan?

    • Troy says:

      you can pay more than you have to if you choose, but it really isnt worth it as every dollar you pay to IBR will only be about .40 in tax when it is forgiven. Would you rather pay a dollar today or .40 in forty years. Your beter off letting the time value of moeny work for you.

  12. To Troy says:

    Troy, that’s only true if you know for sure you will be on IBR for the entire period (i.e., that you know for sure you won’t be paying your loan off within 20 years). I don’t know about you, but 10 or 20 years is a long ways away, and letting your loan principal grow into oblivion w/ negative amortization will make your decision for you. It would be prudent to at least pay the interest of the loan if at all possible, unless you are in public service and know for sure you are staying there.

  13. Carla says:

    Okay I may be the idiot that always has a question in order to clarify but if my plan comes to $0.00 does that mean the government pays my loan and I don’t? I am confused!!


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