How does the Income-based Repayment Plan work?
In a standard 10-year student loan repayment agreement, your monthly payment is calculated from the total amount you borrowed and the applicable interest rate applied over 10 years.
By contrast, under the income-based repayment program, your monthly payment is calculated from your Adjusted Gross Income (AGI) using a federal formula that adjusts for family size. The resulting amount is then divided by 12 to produce a consistent monthly repayment
Advantages of the Income-based Loan Repayment Plan
- Pay as you earn: Your IBR payment is calculated so you can pay off your student loan without draining your budget. Your monthly payments will likely be less than 10% of your income and will be capped at 15% – usually less than the amount you’d have to pay under a 10-year standard repayment plan. (If your IBR repayment turns out to be higher than what you’re paying under the 10-year standard repayment, then your lender may recommend that you stay with your original repayment agreement.)
- Don’t worry about loan interest for three years: If your IBR payment isn’t enough to cover the interest that accrues on your subsidized Stafford loan (either Direct Loan or FFEL), the government will pay your unpaid interest for up to three consecutive years. After three years, and for grad PLUS loans and consolidated loans, the accrued interest will be added to the loan principal only after you’re no longer is eligible for an IBR repayment amount.
- Longer repayment period, and loan cancellation: The loan repayment period for the IBR plan is 25 years (more than double the standard loan payment period). If you meet your IBR plan payments and obligations over that time, whatever loan debt you have left will be cancelled outright.
Drawbacks of the Income-based Loan Repayment Plan
There are also a couple of drawbacks to keep in mind when you evaluate the income-based repayment plan. One is financial, one is a matter of convenience.
- You may pay more interest over the long run. The faster you repay a loan, the less interest you pay; the longer you take to repay, the more interest you pay. Since the IBR plan will extend your repayment period, you’ll owe a lower monthly payment but you’ll pay more total interest over the life of the loan.
- More paperwork to do. To determine your IBR payment amount each year, your lender will ask you to provide updated information about your income and family size every year. If you don’t provide your lender with this documentation on time, your payment will revert to the standard 10-year repayment amount.
- IBR Plan may not benefit you if you’re married and file taxes jointly. Because of a poorly written rule in the program, the income of both spouses is counted as total income for the purposes of determining monthly affordability, even if there’s only one student loan to repay. This is rule will likely be changed in the future, but is in effect for the first year of the IBR plan.
The Project on Student Debt has a good FAQ section on the Income-based Repayment Plan.
How do you sign up for the Income-based Loan Repayment Plan?
Contact the financial institution you got your student loan from. Your lender will confirm your eligibility for the IBR program and calculate your final income-based payment for you.
Examples of Income-based Repayment Plan amounts by income
Source: U.S. Department of Education