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Income-Based Repayment (IBR): An Explanation

Published April 2010, last updated September 2010

Income-Based Repayment (IBR) is a new payment option for federal student loans. This program can help student borrowers keep their loan payments affordable by allowing them to, in effect, restructure the terms of their loans after determining post-graduate income.

The IBR’s defining feature is the fact that payments are capped based on the borrower’s income and family size. This makes the program ideal for borrowers who took out student loans and are now interested in pursuing a lower-income career path such as public interest or government law; however, to qualify for IBR, you need not be pursuing any particular type of career. For most eligible borrowers, IBR loan payments will be less than 10 percent of their income - and even smaller for borrowers with low earnings. IBR will also forgive any remaining debt after 25 years of qualifying payments.

However, IBR is not a good choice for everyone. After a borrower enters the program, interest will continue to accrue on one’s student loans at the same rates (with one exception discussed below). Because interest will continue to accrue and because by entering IBR you are capping your loan payments, you will likely end up paying more interest in the long run than if you were paying down your loans with the highest-possible payments you could afford.

For some borrowers, though – especially those entering very low-paying career paths –

IBR can be an excellent option.

Eligibility for IBR

IBR is designed to help borrowers whose income makes a Standard (10-year) loan payment hard to afford. Anyone with eligible loans can apply to see if his or her payments will be more affordable under IBR.

You are eligible for IBR if:

• You have federal student loans in either the Direct or FFEL Loan programs (remember, you are in the Direct program if your lender is the U.S. Department of Education and you are in the FFEL program if you have a private lender acting as an intermediary to disperse your Federal Student Loans.
• Your loans include Stafford, Grad Plus, and federal Consolidation loans that do not include Parent PLUS loans. Perkins loans are eligible if you consolidate them into a federal Guaranteed (FFEL) or Direct loan.
• Your debt-to-income ratio qualifies you for reduced payments. You qualify if it would take more than 15 percent of whatever you earn, above 150% of the poverty level, to pay off your loans on a standard 10-year payment plan. Use this calculator on the IBR website to check if you qualify.

IBR is not available for:

Private (or "alternative") student loans, state loans, and other loans not guaranteed by the federal government.

How IBR Works

IBR uses a kind of sliding scale to determine how much you can afford to pay on your federal loans. If you earn below 150% of the poverty level for your family size, your required loan payment will be $0. If you earn more, your loan payment will be capped at 15% of whatever you earn above that amount. Except for the highest earners, that usually works out to less than 10 percent of your total income.

This chart shows examples of IBR payment caps as a percentage of the borrower's family income, based on various incomes and family sizes:

Interest

In some situations, your reduced payment under IBR may not cover the interest on your loans. In this case, the government will pay that interest on your Subsidized Stafford Loans for your first three years in IBR. For all other loan types and for Subsidized Stafford Loans after three years, the interest you accrue is added to the total amount you owe. This means your debt might grow under IBR. However, while your debt may grow, if your payments have a very low cap (meaning you earn very little), anything you still owe after 25 years of qualifying payments will be forgiven. This is perfect for borrowers who want to enter extremely low income careers because it gives them a guarantee that they will never have to pay more than they can afford towards their student loans and, in the end, may not have even pay back the full amount they borrowed.

Qualifying Payments

The Department of Education has indicated that the following types of payments will count towards IBR's 25-year forgiveness period, provided the borrower is enrolled in IBR at some point during those 25 years:

• Payments made in the Income Contingent Repayment plan (ICR) before July 1, 2009
• All payments made on or after July 1, 2009 in the IBR, Income Contingent Repayment (ICR), and Standard (10-year) Repayment plans.
• Periods when the borrower has a calculated payment of zero in IBR or ICR (this occurs when your income is at or below 150% of the poverty level for your family size).
• Periods on or after July 1, 2009, when the borrower has been granted an economic hardship deferment.

Applying for IBR

You must apply for IBR through your lender(s). If you borrowed through the FFEL Loan Program will need to contact your lender(s) to determine how to apply for IBR. Some lenders have IBR applications online; others will actually make you call customer service to apply. The Federal Direct Loan Program IBR Application packet can be found here, along with accompanying information.

IBR FAQ’s

Can I use IBR for multiple federal loans?

If you have multiple eligible federal loans, you can still apply for IBR even if the loans are held by different lenders. There's space to list your loans on the FFELP IBR application currently in use. You can look up all your federal loan information in one place, the National Student Loan Data System. You'll need your FAFSA pin to log in; if you don't remember it you can request a duplicate pin at www.pin.ed.gov.

What is my "initial standard monthly payment"?

That's the 10-year standard monthly payment on whatever you owed when you first went into repayment on a given loan: your principal including interest, divided by 120. Here's a calculator to help you determine this amount.

How do I prove my income to my lender?

You'll need to fill out IRS form 4506-T, authorizing the IRS to share your Adjusted Gross Income (or your joint Adjusted Gross Income if you file taxes with a spouse) with your lender. Fill out this form and mail it to your lender along with your IBR application. If you file taxes jointly with your spouse, you'll both need to sign the form.

How else can I document my income?

If your most recent tax return does not accurately reflect your current financial circumstances, or if you didn't file a tax return in 2008, you can request an "alternative documentation of income" form. You'll be asked to provide proof of your income (or lack thereof), such as pay stubs, bank statements, unemployment verification, etc. You have a right to fill out this form if you need it at any time, even if you're already in IBR.

IBR Changes in 2010

On November 1, 2009 the Department of Education finalized two important changes to make IBR more helpful for struggling borrowers. The new rules will go into effect in July 2010:

1) Treatment of Married Borrowers

• Current rule: When two married individuals both have student loan debt and file taxes jointly, they could face up to double the monthly IBR payment of two unmarried borrowers in otherwise identical situations. This is because their combined income is used to calculate each spouse's own IBR payment, ignoring the fact that their joint income must be used to pay down both borrowers' debts.

• Starting in July 2010: This problem will be fixed, as lenders will factor in both spouses' federal loan debts as well as their joint income when calculating IBR payments.

2) Baseline Loan Balance for IBR Eligibility

• Current rule: IBR eligibility and payments are based on a borrower's loan balance when s/he first entered repayment. While good for most borrowers, this works against those whose loan balances have grown since entering repayment, which can happen when interest accrues during forbearances and deferments. In some cases, borrowers whose current loan balance should make them eligible for IBR cannot use the program because their original loan amount was lower.
• Starting in July 2010: Borrowers' IBR eligibility will be based on either their loan balance when they first entered repayment or their current loan amount – whichever is greater. This will allow borrowers whose loan amount has grown to make payments based on what they actually owe, not what they owed in the past.