Income-Based Student Loan Repayment Plan
New student loan repayment plan highlights
- Income-Based Repayment ("IBR") Plan takes effect July 1, 2009
- IBR program covers Stafford loans, Graduate PLUS loans, and most federal consolidation loans
- If you qualify, your monthly loan repayment will be capped at 15% or less
- Repayment period extended to 25 years; after that, any remaining debt is cancelled
About the Income-Based Repayment Plan
If you're trying to manage student loan payments on a tight budget, you'll be glad to hear about a new federal program, the Income-Based Repayment Plan, that goes into effect on July 1.
Just like it sounds, the Income-Based Repayment Plan (the "IBR" plan) will determine an affordable monthly student loan payment based on your income and family size. Calculated on a sliding scale linked to the federal poverty line, the IBR rate caps all eligible student loan repayments at 15% of monthly income, although for many students, loan payments may drop to less than 10% of monthly income, or nothing.
An excellent Boston Globe overview of the income-based repayment plan points out that one of the program's goals is encouragement in a difficult employment climate: as a new grad, you may be willing to accept a lower-paying job if you don't have to worry about a student loan payment bigger than your monthly take-home pay.
Who qualifies for the Income-Based Repayment Plan?
The Income-Based Repayment Plan was designed for students whose student loan debt is high relative to their income and the size of the family that income supports. Since the IBR Plan is a federal program, only federal loans can be repaid through it.
Federal loans eligible for this repayment plan include:
- Stafford loans
- Graduate PLUS loans
- Most federal consolidation loans
The Income-Based Repayment Plan is available only to student borrowers, however, so federal loans taken out by parent borrowers are not eligible. Loans that do not qualify for this repayment program are:
- Parent PLUS loans
- Federal consolidation loans that include Parent PLUS loans
Also, private loans cannot be repaid through the Income-Based Repayment program.
How does the Income-Based Repayment Plan work?
In a standard federal student loan repayment program, which is restricted to 10 years, your monthly payment is calculated from the total amount you borrowed and the applicable interest rate applied over the repayment period.
In contrast, under the income-based repayment program, your monthly payment is calculated from your Adjusted Gross Income (AGI), using a federal formula that adjusts for family size. The resulting amount is then divided by 12 to produce a consistent monthly repayment determined just for you.
If your IBR repayment turns out to be higher than what you're paying under the 10-year standard repayment schedule, your lender may recommend that you stay with your original repayment agreement.
Sample Income-Based Repayment Plan amounts by Income
Source: U.S. Department of EducationIncome-Based Repayment Calculator
A number of websites offer IBR calculators that can give you an idea of whether you qualify for the income-based repayment program. Try the federal financial aid website, the Project on Student Debt IBR info page, or the downloadable worksheet at Sallie Mae, a lender authorized to issue and manage federal student loans.
Advantages of the Income-Based Loan Repayment Plan
The point of the Income-Based Loan Repayment Plan is to make your student loan debt manageable. The new program offers both the obvious benefit and two new features.
- Repay as you earn. Your IBR payment is calculated so you can pay off your student loan without breaking your budget. Monthly payments will likely be less than 10% of your income and capped at 15% - less than the amount you'd have to pay under a 10-year standard repayment plan.
- Get your accrued interest paid for three years. If your IBR payment doesn't cover the monthly interest that accrues on your subsidized Stafford loan (either Direct Loan or FFEL), the government will pay your unpaid interest for up to three consecutive years from when you first enter IBR repayment. After three years, and for grad PLUS loans and consolidated loans, the accrued interest will be added to the loan principal ("capitalized") only after you're no longer eligible for an IBR repayment amount.
- Longer repayment period, and loan cancellation. If your IBR plan payments and obligations have been met in good standing for 25 years, whatever loan debt you have left at that point will be cancelled outright.
Drawbacks of the Income-Based Loan Repayment Plan
There are also a couple of IBR Plan drawbacks you should consider. One is financial, one is a matter of convenience.
- You may pay more interest over the long run. Your lowered payment through the IBR plan will extend your repayment period, which means that you may pay more total interest over the life of the loan. (The faster you repay your loans, the less interest you pay; the longer you take to repay, the more interest you'll pay.) This may be okay with you, in exchange for the more manageable loan payments. Just keep in mind that a 25-year repayment period ultimately means more interest than a 10-year repayment period.
- More paperwork to do. To determine your IBR payment amount each year, your lender will need annually-updated information about your income and family size. If you don't provide your lender with this documentation on time, your payment will revert to the standard 10-year repayment amount.
How do you sign up for the Income-Based Loan Repayment Plan?
If it looks like you'll qualify for the income-based repayment plan, contact the financial institution you got your student loan from. Your lender will confirm your eligibility and calculate your final income-based payment for you.
Source: U.S. Department of Education, June 2009