I recently wrote about managing your student loan repayment. Unfortunately, this process can be more complicated than it should be, and it becomes even more complicated when you are faced with multiple repayment strategies.
In recent years, the U.S. government has unveiled new student loan repayment options aimed at easing the financial strain of individuals and families struggling to repay their loans. The repayment plan created specifically for those who have a high loan debt relative to their income is called the Income-Based Repayment Plan (IBR).
Which Loans Are Eligible Under Income-Based Repayment?
Depending on when you had your loan disbursed, your loan may be under the old Federal Family Education Loan (FFEL) program, or it may be under the William D. Ford Federal Direct Loan Program. If your loan was disbursed after July 2011, it will be a Direct Loan. If it was disbursed prior to July 1, 2011, it could be either program.
Here is a list of eligible loans:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans made to graduate or professional students
- Direct Consolidation Loans without underlying PLUS loans made to parents
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- FFEL PLUS Loans made to graduate or professional students
- FFEL Consolidation Loans without underlying PLUS loans made to parents
Here are the loans that are not eligible:
- PLUS loans made to parents
- Consolidation Loans that include underlying PLUS loans made to parents
- Private education loans
How the Income-Based Repayment Plan Works
IBR is designed for borrowers who have a need to reduce their monthly payments, but do not wish to qualify for a full financial hardship or deferment. You will qualify for the IBR if the combined monthly amount you are required to pay on your eligible student loans under the 10-year standard repayment plan is higher than the monthly amount you would be required to pay under IBR. Essentially, this would be most students.
Your monthly payments under IBR are based on your income and your family size, and are adjusted each year based on the same criteria. Your monthly payments are generally the lowest amount of any repayment plan, and they are spread out over 25 years. You also have to submit annual documentation to your loan servicer to set your new payment amount for the next year.
Advantages of Income-Based Repayment
The IBR repayment program allows you to pay the lowest monthly amount possible and still remain in good standing on your loan. You also do not lose the ability to consolidate your loans into the future. You make your monthly payments based on what you earned, so if your income or family status changes from one year to the next, your loan payments can be adjusted to reflect this change.
You also still have access to the 10-year public service loan forgiveness program, as well as having all loans forgiven after 25 years of repayment under IBR.
Disadvantage of Income-Based Repayment
The most obvious disadvantage to this plan is that you will pay more interest over the life of your loan. Spreading out your repayment schedule to 25 years will lower your monthly payments, but you may pay substantially more interest over the course of your loan repayment.
You will have to re-certify your eligibility and income status each year. Similar to submitting a FAFSA, this information will be used to calculate the amount of monthly payments you will make over the next 12 months.
Getting Help Applying For IBR
It sounds like it could be confusing, but it doesn’t have to be. You can sign up for these programs for free at StudentLoans.gov.
You can also call your student loan servicer and start the process with them.
You never need to sign up with a third party company if you want to change your payments, but you can. Just realize that any third party is helping you with something that you can do for free.
If you’re not quite sure where to start or what to do, consider hiring a CFA or CFP to help you with your student loans. We recommend The Student Loan Planner to help you put together a solid financial plan for your student loan debt. Check out The Student Loan Planner here.
The Bottom Line
Selecting your student loan repayment plan has gotten a lot more complicated in recent years, but I think that may be a good thing. I believe that it forces people to take a moment and really understand their student loans, and it also provides much needed relief for folks who are struggling financially.
Your goal should always be to pay your student loans off as soon as possible. The longer you carry a balance, the more interest you will pay. Your goal should be to select the shortest repayment time period that you can afford. For some this may be the 10-year standard plan, while for others you may need to do the Income-Based Repayment Plan. Extending your loan repayment schedule out is always better than missing a payment or defaulting on your student loans.
The goal is to get your loans paid off as soon as possible through whatever means possible!
Have you ever considered IBR for your student loans?
DJ works in financial services at a large public university. He lives in the Southeast with his wife and young daughter.
Andy Hough says
I’m on the income based repayment plan. My payments have been $0.00 a month for the last few years. I’ll probably have to start making payments next year since my income has increased this year. The drawback of the $0 payments is that my loan balance has been increasing the whole time. At least I know that the loans will for sure be gone one way or the other in 22 years.
LaJuana Peters says
So what if your payments are $0.00 for 25years?? Do they just wipe it out
Robert Farrington says
Your loan is forgiven/discharged. See this: Ultimate Guide To Student Loan Forgiveness.
krantcents says
Most gradyate school loans are private lenders which means you cannot use income based repayment.
Andy Hough says
It may have been that way at one time, but not now. My law school loans were all government loans, specifically GradPlus loans.
Marissa@Financetriggers says
Thanks for this information. Definitely worth sharing. I wonder if this is also available in Canada.
Shelby says
I’m looking into options for settling my loans. I’m very low income (less than $8000 / yr). I let my loans default because there’s no way I could afford payment in the and want aware of all the possibilities. I *should* qualify for discharge as I didn’t have a high school diploma or GED and had a criminal record that would’ve prevented me from working in my field I was going to school for (though I can totally see them trying to say it wasn’t 100% certain that my record which included theft would prevent me from working in the field). I want to try that option to try to get back taxes that have been taken from me. But I almost feel I’d be better off going for the “sure thing” of an IBR (I’m aware of the tax liability at the end of the 20 yrs) as they can’t dispute that my income qualifies me for a $0/month payment. I could double my income and still end up with a calculated discretionary income that’s in the negatives. If I’m granted a IBR, will that mean they no longer offset my income tax refund since I’ll be “making my required payments”? Or will they still take that from me
Robert Farrington says
You should do both – apply for the discharge while getting on a payment plan today. Here’s how to stop getting your taxes offset: https://thecollegeinvestor.com/20755/stopping-tax-offsets-due-student-loan-debt/
Michele Giering says
I’ve been on the income based program for 3 or so years. My issue is, I’m on SSDI for neck and a debilitating skin issue. I am on the Income Driven Plan and based on my current income, it’s been 0 payments for the past three years. I’ve tried working, but can only handle a few days a month. Even when working, my payments are 0 due to how low my income is. My question is: If my income driven plan is at 0 repayment, does that count towards the 25 year loan repayment plan under IDR?
Thank you, Michele
Robert Farrington says
Yes, this is one of the great features of the program. $0 monthly payments count towards your end loan forgiveness. Just make sure you keep renewing your income annually.