Income-Based Repayment of Student Loans

The standard repayment schedule for federal student loans is 10 years, but there have always been many options available to indebted students struggling to repay their loans, including loan consolidation, forbearance, deferment and loan forgiveness.

Recently, the government has tried to make repayment even easier for responsible student loan borrowers. The College Cost Reduction and Access Act (CCRAA) became effective on July 1, 2009. One of the act’s components is the Income-Based Repayment (IBR) Plan.

IBR payments are based on income, family size and residence, and not on the amount borrowed. For most students, payments are capped at 15 percent of a borrower’s discretionary income. President Obama created a new program called Pay as You Earn, which caps payments at 10 percent of discretionary income. To qualify for the 10 percent cap, students must have taken out a student loan on or after Oct. 1, 2011.

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Income-Based Repayment Plan Eligibility

All Stafford, Grad PLUS and 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.

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 2012, for the 48 contiguous states and the District of Columbia. Borrowers with student loan payments below these amounts would not qualify for IBR.

Family Size

IBR Monthly Payment Amount
Annual Income 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 $41 $0 $0 $0 $0 $0 $0
$25,000 $103 $29 $0 $0 $0 $0 $0
$30,000 $166 $91 $17 $0 $0 $0 $0
$35,000 $228 $154 $80 $5 $0 $0 $0
$40,000 $291 $216 $142 $68 $0 $0 $0
$45,000 $353 $279 $205 $130 $56 $0 $0
$50,000 $416 $341 $267 $193 $119 $44 $0
$55,000 $478 $404 $330 $255 $181 $107 $33
$60,000 $541 $466 $392 $318 $244 $169 $95
$65,000 $603 $529 $455 $380 $306 $232 $158
$70,000 $666 $591 $517 $443 $369 $294 $220

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.

While an IBR plan will save a borrower money in the short term, there is one drawback: Since the repayment period can be extended up to 25 years (changing to 20 years under the president’s order) a borrower will end up paying more in interest due to the extended payback time frame.

However, if the loan is not repaid by the end of the extension period, the remaining debt and interest will be forgiven. Also, 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.

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Cecillia Barr

Cecillia Barr is a graduate of the University of Central Florida. She blogs about her extensive knowledge on student loans in order to help others reduce their debt and live financially independent lives.

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