There are a number of loan repayment options available to U.S. federal student loan borrowers, including some that are based on the borrower’s income. Income-Based Repayment (IBR) is a fairly new option that became available July 1, 2009.
IBR bases payments on the borrower’s income and family size.
The income based repayment (IBR) plan is one of several repayment plans that are offered via the William D. Ford Federal Loan Program or the Federal Family Education Loan Program.[1]
The government will pay the borrower's interest on subsidized loans for the first three years under repayment, if the IBR repayment amount does not cover it. If you repay your loans back correctly, under the IBR, and work in a qualifying occuation (e.g. teacher or advocacy law), the government will waive your remaining balance after ten years, otherwise, it is 25 years.[2]
Since a borrower is given a lower monthly payment to make, it will take longer to payback the loan(s), therefore, more interst is paid. Every year new documentation has to be filed in order to stay on the IRB plan that indicates family size and current earnings.
The IBR is a repayment plan that caps required monthly payment at an affordable rate based on income and family size. Monthly payments are not based on how much money a borrower owes, but rather on, how much the borrower earns.[3] The borrower must display partial financial hardship to qualify for IBR. Hardship is determined by reviewing the borrower’s monthly payment amount of all eligible loans under standard repayment against his or her discretionary income. If the borrower qualifies, payments will be capped at no more than 15% of his or her discretionary income.[4] The repayment amount could change annually, based on changes regarding the borrower's income and family size.[5] There is no minimum payment amount with IBR. The borrower is still responsible for interest that builds up over the length of the payment period. After 25 years of repayment and 300 eligible payments, any outstanding balance will be forgiven. (It is possible to repay the loan in full before 25 years have passed.)
Utilizing the IBR calculator found at www.studentaid.ed.gov/ibr, a borrower can calculate his/her monthly payments, however, contacting your loan servicer can give a better determination of qualifying for the IBR. The National Student Loan Data System (NSLDS) at www.nslds.ed.gov can let a borrower know who is the servicer of his/her loan.[6]
The monthly payment amount is based on the adjusted gross income amount and the family size. The borrower has to report his/her income and family size annually. The monthly payment amount can increase or decrease each year based on this information.[7]
The major differences between these two plans, is that in order to qualify for the IBR, the borrower must show a financial hardship. Under the IBR plan, a borrower's income and family size is the only factors considered when setting-up a monthly payment plan. Under the Income-Contingent Repayment (ICR) plan these factors are considered, plus how much debt the borrower is actually carrying.[8]
A Public Service Loan clause is embedded within the IBR which states that a borrower who works in the public sector can have any remaining balance forgiven after making payments for 10 years.[9]
As of July 1, 2010, the loan amount used to determine partial financial hardship is either the greater of the loan amount at the time the borrower initially entered repayment or the loan amount at the time the borrower elected to repay under IBR. Also as of July 1, 2010, married borrowers who file joint tax returns may have their eligible student loans combined in determining repayment amounts.
To apply for IBR, the borrower needs to provide information about family size, income, and taxes, and fill out IRS Tax Form 4506-T, along with an Income-Based Repayment Plan Application.
IBR is available to borrowers in the William D. Ford Direct Loan Program (e.g. Federal Direct Student Loan Program) and the Federal Family Education Loan Program. Most federal loans are eligible, but there are a few exceptions.
Eligible loans include[10]:
Ineligible loans include: