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Income-Based Repayment

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The Income-Based Repayment (IBR) plan was enacted as part of the College Cost Reduction and Access Act of 2007 and became available on July 1, 2009. It is best for borrowers who are experiencing financial difficulty, have low income compared with their debt, or who are pursuing a career in public service.

Income-based repayment is intended as an alternative to income sensitive repayment (ISR) and income contingent repayment (ICR). (Both ISR and ICR plans will continue to exist.) It is designed to make repaying education loans easier for students who intend to pursue jobs with lower salaries, such as careers in public service. It does this by capping the monthly payments at a percentage of the borrower's discretionary income, which is based on the borrower's income and family size, not the total amount borrowed. The monthly payment amount is adjusted annually, based on changes in annual income and family size.

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Most borrowers will have a monthly payment under income-based repayment that is less than 10% of gross income. This includes single borrowers with less than $50,000 in income and married borrowers with two children who have less than $100,000 in income.

See also the list of Answers to Frequently Asked Questions about Income-Based Repayment and Public Service Loan Forgiveness.

Eligible Loans

Income-based repayment is only available for federal student loans, such as the Stafford, Grad PLUS and consolidation loans. It is not available for Parent PLUS loans or for consolidation loans that include Parent PLUS loans. (However, some consolidation loans that include Parent PLUS loans may be eligible for income-contingent repayment. To be eligible for income-contingent repayment, a Parent PLUS loan must be included in a consolidation loan in the Direct Loan program and the parent must not have entered repayment before July 1, 2006.) IBR is not available for Perkins loans, but it is available for consolidation loans that include Perkins loans. It is also not available for private student loans.

Capped at Percentage of Discretionary Income

Income-based repayment is similar to income-contingent repayment. Both cap the monthly payments at a percentage of your discretionary income, albeit with different percentages and different definitions of discretionary income. Income-based repayment caps monthly payments at 15% of your monthly discretionary income, where discretionary income is the difference between adjusted gross income (AGI) and 150% of the federal poverty line that corresponds to your family size and the state in which you reside. There is no minimum monthly payment. Unlike income-contingent repayment, which is available only in the Direct Loan program, income-based repayment is available in both the Direct Loan program and the federally-guaranteed student loan program, and loan consolidation is not required.

Income-based repayment is based on the adjusted gross income during the prior tax year. In some cases the prior year's income figures may not be reflective of your financial circumstances. For example, your income may be lower this year due to job loss or a salary reduction. In such a circumstance you can file an alternative documentation of income form to get an adjustment to your monthly payment. A draft version of the form is currently available; the final version of the form with a valid OMB approval number can be obtained from your lender. (The Direct Loan Program version of the alternative documentation of income form is available now.)

(Overall, income-based repayment is probably a bit better for borrowers than income-contingent repayment, especially if the borrower's financial circumstances improve. Income-contingent repayment caps monthly payments at 20% of the difference between AGI and 100% of the federal poverty line. Income-based repayment is clearly more generous than this aspect of income-contingent repayment, since it assesses a lower percentage, 15%, of a smaller definition of discretionary income, the excess of income over 150% of the poverty line. Income-contingent repayment also capped monthly payments at the 12-year extended repayment plan monthly payment multiplied by an income percentage factor of 50% or more based on income and marital status. However, few borrowers would trigger the income percentage factor caps.)

For example, consider a single borrower earning $30,000 a year with $40,000 in federal education loans. Using the 2009 poverty line of $10,830 for the continental US, the monthly payment cap under income-based repayment will be 15% * ($30,000 - 150% * $10,830) / 12 = $171.94 a month. Under income-contingent repayment the monthly payment is 20% * ($30,000 - 100% * $10,830) / 12 = $319.50. This compares with $277.63 under extended 25-year repayment and $460.32 a month under standard 10-year repayment.

Loan Forgiveness

The maximum repayment period is 25 years. After 25 years, any remaining debt will be discharged (forgiven). Under current law, the amount of debt discharged is treated as taxable income, so you will have to pay income taxes 25 years from now on the amount discharged that year. But the savings can be significant for students who wish to pursue careers in public service. And because you will be paying the tax so long from now, the net present value of the tax you will have to pay is small.

A new public service loan forgiveness program will discharge the remaining debt after 10 years of full-time employment in public service. Unlike the 25-year forgiveness, the 10-year forgiveness is tax-free due to a 2008 IRS ruling. The borrower must have made 120 payments as part of the Direct Loan program in order to obtain this benefit. Only payments made on or after October 1, 2007 count toward the required 120 monthly payments. (Borrowers may consolidate into Direct Lending in order to qualify for this loan forgiveness program starting July 1, 2008.)

For a typical law school graduate pursuing a career as a public defender, the annual income is about $40,000 and the total federal education debt is $120,000. The monthly payments under income-based repayment will be 8.9% of monthly income, compared with 11.9% under income-contingent repayment, 23.5% under 30-year repayment and 41.4% under standard 10-year repayment. After working as a public defender for ten years all the remaining debt would be forgiven, including the original $120,000 loan balance and more than $30,000 in accrued but unpaid interest. This makes it possible for public-spirited students to pursue lifelong careers in public service despite the high debt and low salaries.

Unpaid Interest

In addition to discharging the remaining balance at the end of 25 years (10 years for public service), the IBR program also includes a limited subsidized interest benefit. If your payments don't cover the interest that accrues, the government pays or waives the unpaid interest (the difference between your monthly payment and the interest that accrued) on subsidized Stafford loans for the first three years of income-based repayment. Interest on unsubsidized loans and interest that accrues on subsidized Stafford loans after the first three years will be capitalized upon status changes (e.g., a borrower is no longer eligible for IBR or chooses to switch to a different repayment plan). Borrowers who are concerned about the potential for negative amortization, where the amount owed grows because the payments are less than the interest that accrues, always have the option of increasing the payment to at least the interest since federal education loans do not have prepayment penalties.

Who Will Benefit from IBR?

The IBR program is best for students who will be pursuing public service careers and borrowers with high debt and low income (e.g., a debt-to-income ratio of 1.0 or higher for single borrowers). Having a large household size also helps. Borrowers who have only a short-term temporary income shortfall may be better off seeking an economic hardship deferment.

If the borrower's income is near or below 150% of the poverty line, the monthly payment under IBR will be $0. In effect, IBR will then function like the economic hardship deferment for the first three years and like a forbearance thereafter.

Students who are not pursuing careers in public service may be intimidated by the thought of a 25-year repayment term. However, it is worth careful consideration, especially by students who might be considering using an extended or graduated repayment plan. IBR will likely provide the lowest monthly payment for many low income borrowers and certainly is a reasonable alternative to defaulting on the loans.

Generally, a debt-to-income ratio of 1.5 or more will result in forgiveness after 25 years except for borrowers with six figure incomes, and a debt-to-income ratio of 1.0 or more will result in forgiveness after 10 years.

Calculating the Benefit of IBR

Since the monthly payment and financial benefits depend on the borrower's family size and income trajectory, it is best to use a specialized calculator to evaluate the benefits on a personalized level.

Calculating the cost of a loan in the IBR program can be somewhat complex, in part due to the need to make assumptions about future income and inflation increases. FinAid provides a powerful Income-Based Repayment Calculator that lets you compare the IBR program with standard and extended repayment. You can compare the costs under a variety of scenarios, including the possibility of starting off with a lower income and later switching to job with a higher salary.

FinAid's IBR calculator also computes the net present value of the total payments, telling you how much they would cost in constant dollars. The idea is that a dollar ten years from now will have less buying power than a dollar today, due to inflation. Net present value tells you how much that dollar would be worth today, under certain assumptions. Comparing different loans using constant dollars can provide a more realistic analysis of the difference in real cost.

When comparing the IBR program with the standard and extended repayment programs, it is important to recognize that the loan term has a significant impact on loan cost. Although net present value figures allow you to compare costs on a constant dollar basis, comparing the cost of a 10 year loan with a 25 year loan is like comparing apples and oranges. A 10 year loan will likely have a lower overall cost than a 25 year loan, primarily because of the shorter loan term. For example, consider a student with a $72,000 loan and an AGI of $40,000. Under the IBR program, the net present value is $77,940.78. Under the standard repayment program, the net present value is $76,074.74. So the standard repayment program is slightly less expensive than the IBR program. However, it would be a mistake to conclude from this that the extended repayment program with a 25 year loan term is better than the IBR program, because the relative costs change as the loan term increases. The 25-year extended repayment program turns out to have a net present value of $80,743.06, more expensive than the IBR program.

The following chart illustrates the monthly payments under income-based repayment plan for various family sizes and annual income. You can customize the chart with the Income-Based Repayment Chart Generator.

Income-Based Repayment (IBR) Monthly Loan Payment
Annual
AGI
Family Size
1234567
$10,000$0$0$0$0$0$0$0
$15,000$0$0$0$0$0$0$0
$20,000$47$0$0$0$0$0$0
$25,000$109$39$0$0$0$0$0
$30,000$172$102$32$0$0$0$0
$35,000$234$164$94$24$0$0$0
$40,000$297$227$157$87$16$0$0
$45,000$359$289$219$149$79$10$0
$50,000$422$352$282$212$141$71$0
$55,000$484$414$344$274$204$134$64
$60,000$547$477$407$337$266$196$126
$65,000$609$539$469$399$329$259$189
$70,000$672$602$532$462$391$321$251
$75,000$734$664$594$524$454$384$314
$80,000$797$727$657$587$516$446$376
$85,000$859$789$719$649$579$509$439
$90,000$922$852$782$712$641$571$501
$95,000$984$914$844$774$704$634$564
$100,000$1,047$977$907$837$766$696$626

Marriage Penalty

The marriage penalty inherent in the IBR formula was corrected by Congress (P.L. 110-153, December 21, 2007) by allowing a married borrower who files income tax returns as "married filing separately" to count only the borrower's adjusted gross income and student loan debt. This lets a borrower exclude the (higher) income of his/her spouse when calculating the cap on monthly payments under income-based repayment instead of combining the income as under the original legislation.

Community property states generally attribute half of the earnings of a married couple to each spouse, so in those states, the AGI on the tax return of a married borrower who files a separate tax return will usually include half of the couple's combined earnings, plus any other separate income of the borrower. Therefore, depending on the spouse's earnings, the borrower's AGI on a separate return could be higher or lower than the borrower's own earnings. However, the preamble to the November 1, 2012 regulations encourages borrowers in community property states to use alternative documentation of income instead of income tax returns to obtain the same advantages that are available to borrowers in other states.

Can Switch Repayment Plans

An important feature of the government's IBR program is that although you must initially sign up for 25-year income-based or income-contingent repayment, you are not locked into this payment plan. If your circumstances change or if you just decide that you want to pay off your loan more rapidly, you may do so. (Borrowers who switch into Direct Lending in order to obtain public service loan forgiveness are limited to the IBR, ICR and standard repayment plans.)

New Version of IBR Starts in July 2014 Fall 2012

The Health Care and Education Reconciliation Act of 2010 cuts the monthly payment under IBR by a third, from 15% of discretionary income to 10% of discretionary income, and accelerates the loan forgiveness from 25 years to 20 years. However, it is only effective for new borrowers of new loans on or after July 1, 2014. Borrowers who have federal loans before that date are not eligible for the improved income-based repayment plan. Public service loan forgiveness remains available in the new IBR plan.

However, President Obama announced a proposal in October 2011 to make the new income-based repayment plan available two years earlier and to more borrowers. This fast-tracking of the new income-based repayment plan modifies the regulations for the income-contingent repayment plan (a predecessor to income-based repayment) to transform it into the new income-based repayment plan. This version of income-based repayment, called ICR-A, requires the borrower to have at least one loan disbursed in FY2012 or a later year and to have been a new borrower as of the start of FY2008 (i.e., no loans prior to October 1, 2007 on October 1, 2007). A borrower with loans prior to FY2008 cannot become a new borrower by consolidating the pre-FY2008 loans. ICR-A is available only for loans in the Direct Loan program, since income-contingent repayment is available only for loans in the Direct Loan program. Normally a regulatory change like this would be effective starting July 1, 2013, except the US Department of Education will use its authority to implement early adoption starting in fall 2012.

A separate 10% version of the income-based repayment plan calculator is available for borrowers who qualify for the improved income-based repayment plan.

Executive Order Makes New IBR Available Two Years Earlier

President Obama issued an executive order in October 2011 making the new income-based repayment plan available two years earlier. The new income-based repayment plan is now available to borrowers who have at least one federal student loan in 2012 or a later year and no loans prior to 2008.

See also Trick or Treat: President Obama's Plan for Cutting Federal Student Loan Payments.

Other Options

Borrowers who don't qualify for income-based repayment may wish to review FinAid's section on Trouble Repaying Debt. For example, such borrowers may wish to consider the economic hardship deferment, forbearances or extended repayment for their federal loans. Options for repayment relief on private student loans are more limited.

Additional Information

Prof. Phil Schrag, a law professor at Georgetown University Law Center has written a 21-page law review article concerning income-based repayment and public service loan forgiveness: Schrag, Philip G., Federal Student Loan Repayment Assistance for Public Interest Lawyers and Other Employees of Governments and Nonprofit Organizations, Hofstra Law Review 36(1), September 2007. The article includes practical advice concerning the two programs, as well as detailed examples. The article can be found at the Social Science Research Network, the NELLCO Legal Scholarship Repository and on the Georgetown University Law Center web site.

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