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Student Loans

What Is Income-Based Repayment?

An income-based repayment program, or IBR, is one of four income-driven plans available to federal student loan borrowers. An income-based student loan repayment plan calculates your required monthly payment based on your income and the size of your family.

For qualified borrowers, the monthly payment for an IBR loan is capped at either 10% or 15% of your discretionary income.

Discretionary income is the amount of your adjusted gross income that exceeds 150% of federal poverty guidelines, based on the size of your family. (Adjusted gross income is the sum of all of your income minus any deductions.)

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Am I Eligible for Income-Based Repayment?

Only federal loans made to students are eligible for the income-based repayment plan. This includes student loans for undergraduate studies, PLUS loans made to graduate students, and consolidated federal loans that do not include any parent PLUS loans.

Even if you are currently repaying student loans on a different plan, you can apply to switch to a different plan at any time, for free.

Parents who borrow from the Federal PLUS loan program are not eligible for income-based repayment plans.

Private student loans from a bank, credit union or online lender are not eligible for income-based repayment.

How do I Apply for Income Based Repayment?

You can apply online at the Department of Education's website, or you can contact your student loan servicer and discuss your eligibility for an income-based repayment plan.

How Much Will My Payments Be for Income Based Repayment?

For eligible college loans taken out before July 1, 2014, the income-based repayment plan caps monthly payments at 15% of your discretionary income.

For eligible college loans taken out after July 1, 2014, the income-based repayment plan caps monthly payments at 10% of your discretionary payments.

If you work in a public-sector job that qualifies for the Public Service Loan Forgiveness Program, your remaining loan balance can be forgiven after 10 years. (The 2018 budget proposal from the Trump Administration aims to eliminate this program.)

The U.S. Department of Education has a free online student loan repayment calculator that will give you a sense of whether you may qualify for IBR, and an estimate of your monthly payments under IBR and other income-driven repayment programs.

Will I Pay the Same Amount Every Year With an Income-Based Repayment Plan?

When you sign up for a standard 10-year student loan repayment plan your payments will be the same each month for the entire 10-year period. With income-based retirement plans, you are required to file paperwork each year to "recertify" your income and the size of your household. Your IBR payment can be adjusted each year, based on any changes to your income or household. That said, the payment will never exceed what you would owe based on a standard 10-year repayment plan.

How Long Will It Take to Pay off Student Loans Using the Income-Based Retirement Plan?

Because you will be making lower monthly payments than you would under the standard 10-year repayment plan, it will take you longer to pay off your college loans. If you are still paying off a loan under the IBR program after 20 or 25 years, you will be eligible for student loan forgiveness.

Loan forgiveness wipes out any remaining balance you owe after a certain number of years of on-time payments:

  • If your first student loans were issued before July 1, 2014, the remaining balance on an IBR loan will be forgiven after 25 years.
  • If your student loans were issued after July 1, 2014, your loan will be forgiven after 20 years.

Be aware that any loan balance that is forgiven will be counted as taxable income in the year it was forgiven. For instance, if you have a remaining balance of $10,000 that is forgiven, you will owe federal income tax on that $10,000, and depending on where you live you may also owe state and local income tax as well.

What are the Downsides to the Student Loan Income-Based Repayment Plan?

There are 4 main drawbacks of IBRs:

  1. You will likely be in debt for longer than if you chose the standard 10-year repayment plan.
  2. Depending on the size of your student loans, your monthly payments may not be enough to cover the interest you owe. That would cause your student loan balance to grow, as the unpaid interest will be added to the amount you already owe.
  3. You must remember to "recertify" your information each year. Your monthly payment may be higher or lower based on any changes to your income or the size of your household. If you fail to recertify, your payments will be recalculated based on a 10-year repayment schedule. That will typically mean an increase in your required monthly payment.
  4. Student loan debt that is forgiven after 20 or 25 years will be reported as taxable income for that year.

What are the Credit Considerations if I Choose Income-Based Repayment?

Paying a debt off more slowly could have a negative impact on your credit score if you're not careful. Your history-making on-time payments is a factor in your credit score.

Extending your repayment from the standard 10-years to as long as 25 years increases the need to stay on top of your payments for a much longer stretch of time. Automating your payments can be a smart way to make sure you stay on time with your student loan repayments.

Paying back your student loans with IBR could also make it harder to qualify for auto loans or mortgages, or it may reduce how much you are allowed to borrow. When you apply for a loan, lenders factor in your total debt payments—new and old—when reviewing your loan application. The longer you carry a student loan balance, the longer it will be a factor whenever you apply for credit.


Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer, or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
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