Understanding Income-Based Repayment Plans for Federal Student Loans

Are you struggling to keep up with your federal student loan payments? If so, you might find relief through an income-based repayment (IBR) plan. This plan is one of the four income-driven repayment programs offered to federal student loan borrowers. If you qualify, your loan servicer may reduce your monthly payment to as low as 10% of your discretionary income. Here’s everything you need to know about how the income-based repayment plan works and what to consider before applying.

What Is Income-Based Repayment?

The income-based repayment plan, often referred to as IBR, adjusts your federal student loan payment based on your discretionary income. If you received your first federal student loan on or after July 1, 2014, your new payment will be 10% of your discretionary income, and you’ll need to recertify your income each year. If you still have a balance after 20 years, the remaining amount will be forgiven.

If you received a federal student loan before July 1, 2014, the IBR plan reduces your monthly payment to 15% of your discretionary income, with any remaining balance forgiven after 25 years. Through the 2025 tax year, any federal student loan debt forgiven under an income-driven repayment plan is not subject to federal income tax, although some states may assess a state income tax.

How Is Income-Based Repayment Calculated?

The U.S. Department of Education calculates your discretionary income by taking the difference between your annual income and 150% of the poverty guideline for your state of residence and family size. Each year, you’ll recertify these details, which means your payment may increase as your income does. However, it will never exceed the monthly payment you’d otherwise pay based on the 10-year standard repayment plan.

Who Is Eligible for Income-Based Repayment?

Only federal student loan borrowers who have eligible loans and demonstrate financial need can qualify for the IBR plan. More specifically, you must show that your monthly payment under the IBR plan would be less than what you’re currently paying on a standard repayment plan. Generally, you’ll meet this requirement if your student loan debt represents a significant portion of your annual income, or your debt is higher than your annual discretionary income.

Eligible loans include:

• Direct subsidized loans
• Direct unsubsidized loans
• Direct PLUS loans made to graduate or professional students
• Direct consolidation loans
• Subsidized federal Stafford loans
• Unsubsidized federal Stafford loans
• Federal Family Education (FFEL) PLUS loans
• FFEL consolidation loans

Note that parent PLUS loans are not eligible for IBR, even if they’re consolidated. If you have federal Perkins loans, you can access the program by consolidating them through the direct loan consolidation program. However, doing so would disqualify you from the Perkins loan forgiveness program.

Pros and Cons of Income-Based Repayment

Before you apply for an IBR plan with your loan servicer, it’s important to consider both the advantages and disadvantages that come with it.

Pros

• Financial relief: If your financial situation is tight, reducing your student loan payment can give you some breathing room. This can be particularly beneficial if you’re at risk of falling behind on student loan or other debt payments.
• Possibly no monthly payment: If your annual income is below the 150% discretionary income threshold, your monthly payment may be set to $0.
• Much of your debt may be forgiven: If your income never increases to the point where it makes sense to switch back to the 10-year standard repayment schedule, you may get a significant chunk of your student loan debt forgiven after you complete your IBR plan repayment term.

Cons

• Longer debt term: Instead of the standard 10-year repayment plan with federal loans, your repayment term will be 20 or 25 years, depending on when you first started borrowing federal loan money. If 10 years sounds like a long time to be in debt, the idea of doubling that time (or more) may not sound too appealing.
• Interest: Because your repayment term will be extended to up to 25 years, you’ll end up paying more in interest than if you were to stay on the standard plan. Your payments may not even be enough to cover the accrued interest, which means your student loan balance may grow over time.
• Uncertainty about taxation: While Congress has exempted forgiven student loan debt from federal income tax through 2025, it’s unclear whether that provision will continue beyond that point. Even if the federal government doesn’t tax your forgiven debt as income, some states still may.

How to Apply for Income-Based Repayment

You can apply for an IBR plan with your student loan servicer or through the Federal Student Aid (FSA) website. Here are the steps you’ll take:

1. Research all of your options: Before you apply for an IBR plan, take your time to learn about and compare the other income-driven repayment plans to ensure you pick the one that’s the right fit for you. You can even use a loan simulator to get an idea of what your payments would look like with each one.
2. Submit an application: When you’re ready to apply, fill out and submit an income-driven repayment plan request through the FSA website. The process takes 10 minutes or less, and you’ll need your FSA ID, financial information, personal information, and your spouse’s information, if applicable.

After you submit your request, it can take a few weeks for your servicer to process it. To speed up the process, submit all the required documentation as soon as possible.

Alternatives to Income-Based Repayment

The federal government offers four income-driven repayment plans and other relief options, so it’s important to consider all of them to make sure you find the right fit.

Pay As You Earn (PAYE)

With this plan, your payment will be 10% of your discretionary income—calculated the same as the IBR plan—and will never be higher than your payment on the standard 10-year plan. Your repayment term will be extended to 20 years. Only borrowers who provide evidence of financial need are eligible for this plan.

Saving on a Valuable Education (SAVE)

Under the SAVE plan, your payment will be 10% of your discretionary income, which is calculated as the difference between your income and 225% of the federal poverty guideline. If your payment isn’t high enough to cover accruing interest, your loan servicer won’t add the excess interest to your balance. Currently, the plan offers forgiveness after 20 years for undergraduate loans and 25 years for graduate and professional loans. In July 2024, however, the payment amount will drop to 5% of your discretionary income, and you can qualify for forgiveness in as little as 10 years.

Income-Contingent Repayment (ICR)

This plan is the only one that’s available to all federal loan borrowers, including parents. Your repayment term will be 25 years, and your monthly payment will be the lesser of 20% of your discretionary income (this time based on 100% of the federal poverty guideline) and what you would pay on a 12-year repayment term, adjusted according to your income.

Deferment or Forbearance

If your financial hardship is short-term in nature, you may also consider deferment or forbearance instead of an income-driven repayment plan. Both options can give you a break from monthly payments for at least a few months until you’re back on your feet.

Frequently Asked Questions

Are Parent PLUS Loans Eligible for Income-Based Repayment?

No, parent PLUS loans are not eligible for income-based repayment, even if they’re consolidated.

Which Income-Based Repayment Plan Requires Spousal Income?

All income-driven repayment plans, including IBR, require spousal income if you file your taxes jointly.

Will Income-Based Repayment Hurt My Credit Score?

Enrolling in an income-based repayment plan itself will not hurt your credit score. However, missing payments or defaulting on your loans can negatively impact your credit.

Stay on Top of Your Credit to Improve Your Long-Term Financial Standing

While you may be struggling financially, working to build and maintain a good credit history can help improve your financial well-being over time. With great credit, you can score lower interest rates on loans and credit cards, save money on car and homeowners insurance, and more.

With Experian’s free credit monitoring service, you’ll get free access to your Experian credit report and your FICO® Score powered by Experian data. You’ll also get real-time alerts when changes are made to your report, making it easy to track your progress and address potential issues as they arise.

If you have any questions or need assistance with your mortgage needs, don’t hesitate to contact O1ne Mortgage at 213-732-3074. Our team of experts is here to help you navigate your financial journey and find the best solutions for your needs.