Income-Based Repayment of Student Loans

Finding a decent solution to paying off student loan debt is becoming almost as difficult for college graduates as finding a decent job.

The federal government defaults every student loan borrower into the Standard Repayment Plan, a 10-year program of fixed monthly payments. In other words, you pay the same amount your first year out of school, regardless of salary, that you pay 10 years later

That program could work for those who receive a substantial starting salary. Those who don’t – or can’t find a job at all – are sent scurrying to find affordable repayment programs that balance income, family size and the cost of living.

The Income-Based Repayment Plan, one of four debt-relief programs instituted by the federal government, might be the most attractive choice for the 73% of graduates in the Class of 2017 who left school with student loan debt. The IBR plan not only bases your payment on your income, but also promises loan forgiveness. To qualify for loan forgiveness, you must make on-time payments for 20 years for loans disbursed after July 1, 2014 or 25 years for loans disbursed before July 1, 2014.

There always have been options available to indebted students struggling to repay their loans, including loan consolidation, forbearance, deferment and loan forgiveness.

However, the student loan debt crisis has soared dramatically over the last decade. In 2007, total student loan debt was $548 billion, compared to $1.4 trillion in 2017. That is a 155% increase! The average graduate with loans in 2007 owed $20,098 compared to $37,172 in 2017, an 85% increase in a decade!

Difference Between IBR Plan and Standard Repayment Plan

If you don’t sign up for the Income-Based Repayment Plan or one of the other income-driven plans that include the Pay As You Earn (PAYE), Repay As You Earn (REPAYE) and Income-Contingent Plan (ICP), you automatically are defaulted into the Standard .Repayment Plan.

The difference between the Standard Repayment Plan and the Income-Based Repayment plan is substantial. For example, if you start out making $25,000 and have the average student loan debt for the class of 2017, which was $37,172, you would be making monthly payments of $406 under the Standard Repayment Plan.

Compare that to paying just $86 a month under the Income-Based Repayment plan.

Advantages of Income-Driven Repayment Plans

The most obvious advantage is that because your payments are based on your income, you won’t get overwhelmed if you come out of college and can’t find a job or land one with a starting salary of just $25,000 a year.

If you expect your salary to remain low, or for your family size to grow over the next 20 years, Income-Based Repayment would be a good program for you.

There are many other advantages that make the Income-Based Repayment program a popular choice. Those include:

• No matter how much your income increases, you will never pay more than you would if you had chosen the 10-year Standard Repayment Plan.
• Payments are based on your current income and are re-evaluated every year so if you are unemployed or see a dip in salary for any reason, your payments should go down.
• Payments are capped at 10% of discretionary income if you received loan money after July 1, 2014 and 15% if you received loan money before then.
• You are eligible for loan forgiveness after 20 or 25 years, depending on when you borrowed the money.
• The plan is available to undergraduate and graduate students.
• You have the flexibility to change plans if you want to pay off the loan faster.

Disadvantages of Income-Based Repayment

There are two sides to every story, including this one and the downside certainly is worth examining.

The biggest disadvantage for the Income-Based Repayment plan is that if you have several years where your income is extremely low, your monthly loan payments may not be enough to cover the interest due and you experience “negative” amortization.

In that case, the balance owed on your loan actually goes up.

Why should that matter if you will have it all forgiven after 20 or 25 years? Because current IRS rules say you must pay taxes on the amount forgiven. The earliest anyone will qualify for loan forgiveness is 2034, so Congress could change that, but that is the rule for now.

Other disadvantages to consider with the Income-Based Repayment plan include:

• The amount of interest paid over 20 years will mean you pay higher total than if you had opted for Standard Repayment Plan
• Payments are recalculated every year, so if your income increases, your payment will rise with it.
• The program only doesn’t apply to private loans.

Income-Based Repayment Plan Eligibility

All Stafford, Grad PLUS and Direct Consolidated Loans made under either the Direct Loan or Federal Family Education Loan (FFEL) Program (which guarantees private lender loans) are eligible for IBR.

Uninsured private loans, Parent PLUS loans, loans that are in default, consolidation loans that repaid Parent PLUS loans, and Perkins loans are not eligible.

To qualify for IBR, a borrower must demonstrate a “partial financial hardship.” A formula using adjusted gross income (AGI), family size and state of residence will determine how much a borrower is able to pay. If that amount is less than the monthly amount required under the standard 10-year repayment plan, that student would be eligible for IBR.

If a borrower’s AGI is less than 150 percent of the federal government’s established poverty line, the monthly payment under IBR is zero. In addition, if a monthly IBR payment doesn’t cover the loan’s interest, the federal government will pay the unpaid accrued interest on a subsidized Stafford loan for up to three years from the time an IBR plan is implemented.

Chart for Income-Based Repayment Plan

The monthly payments due on the Income-Based Repayment plan are calculated by your loan servicer and must be recalculated every year. The calculations involve your income, family size and state of residence. Even if none of that information changes, you still must resubmit an application form to your loan servicer every year.

The following chart shows the maximum IBR monthly payment amounts for a sample range of incomes and family sizes using the poverty guidelines that were in effect as of January 2017, for the 48 contiguous states and the District of Columbia. Borrowers with student loan payments below these amounts would not qualify for IBR.

The estimates are based on owing $37,172, the average student loan debt for the Class of 2016. The fixed monthly repayment for that amount on the Standard Repayment Plan would be $406 per month.

The chart demonstrates that a single borrower on the Income-Based Repayment plan must earn at least $20,000 a year, before they are required to make a loan repayment. The single borrower remains eligible for the program for any salary up to $55,000.

However, if you start in the IBR program and your income exceeds $55,000, you can remain on the program. Your payment will change to $406 per month, the same that it would have cost if you had chosen to use the Standard Repayment Plan.

DNQ – Does Not Qualify

Source: U.S. Department of Education

Every year, borrowers repaying under IBR must resubmit documentation of income and family size to their lender(s). Payments will then be adjusted to conform to any new information. In addition, if income changes radically during the year, a borrower can apply for a recalculation of the monthly repayment amount.

If a borrower works in various public-service professions and makes payments under an IBR plan, their loan(s) may be forgiven after only 10 years of on-time, full monthly payments.