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Student Loan IBR Income Based Repayment Plans

A few weeks ago I asked newsletter subscribers [3] 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 [4] 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 [5]. 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 [6] 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 [7], 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 [8] 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
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?


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 [9])