Income-Based Repayment (IBR) Guide
Income-Based Repayment or “IBR” is one of four income-driven repayment plans designed for borrowers with high federal student debt balances, as compared to their income.
Income-Based Repayment (IBR): is the staple income-driven repayment plan for borrowers. Here’s everything you need to know about it:
As the cost of college started to rise, so did the need for a more affordable repayment option. Higher student loan balances meant higher monthly payments, especially on a balanced-based repayment plan like the 10-year Standard.
Paying back student loans would be unaffordable.
Instead of using student loan balances and interest rates to determine monthly payments, income-driven repayment plans like IBR would use a percentage of a borrower’s income.
IBR Plan Eligibility
Income-Based Repayment (IBR) was designed to help students with higher federal student loan balances relative to their income and family size.
To be eligible for IBR, you have to demonstrate financial need. It’s available to student borrowers (not parents) with either Direct or FFEL loans.
The fact that you need to qualify for IBR is a blind spot for busy professionals.
REPAYE ends up being the repayment plan of choice due to the lower monthly payments and the ability to earn forgiveness. However, REPAYE payments can end up higher than those on a 10-year Standard plan as your income increases.
Your monthly payment must be less than what you would pay under the 10-year Standard repayment plan to qualify for IBR. A mistake could end up with a much more accelerated repayment schedule.
Messing up will most certainly eliminate your chance to earn forgiveness.
Eligible Loans: Direct Loans (Subsidized and Unsubsidized), Direct Graduate PLUS loans, Direct Consolidation loans.
What are IBR payments like?
Income-Based Repayment (IBR) is one of four income-driven repayment plan options (IBR, ICR, PAYE, & REPAYE).
Income-driven repayment plans calculate your monthly payment by using a percentage of your “discretionary income” whereas balanced-based programs (like 10-year Standard) calculate your payments based on your student loan balance and interest rate.
In short, IBR makes payments more manageable. It keeps payments lower while simultaneously allowing borrowers to earn forgiveness.
IBR will cap monthly payments for loans disbursed before July 1, 2014, at 15 percent of your discretionary income. Any balance remaining after 25 years will be forgiven.
Loans disbursed on or after July 1, 2014, will use a newer version of IBR. Often called, “new IBR,” this program caps monthly payments at 10 percent of your discretionary income (instead of 15 percent). Any balance remaining after 20 years of repayment will be forgiven.
As you can see, the new IBR is much more favorable but only applies to newer borrowers.
Upside to Income-Based Repayment (IBR)
There are many upsides to the Income-Based Repayment (IBR) plan. From affordable monthly payments to the ability to earn forgiveness, it’s easy to see why it’s become a staple repayment option. While there are a lot of upsides, they all vary based upon the type of work you do, how much you make, to whether you plan on getting married.
Here are just a few remarkable benefits to the program that our clients enjoy:
- Affordable monthly payments. IBR uses a percentage of your income to determine your monthly payment. This makes monthly payments more manageable to early-career professionals.
- Ability to earn forgiveness. While earning forgiveness through an income-driven repayment plan like IBR is taxed as income, not having to pay a six-figure student loan balance takes the cake. With IBR, you earn forgiveness in 20 to 25 years.
- IBR is easier to understand. Out of all your income-driven repayment options, IBR is the most straightforward. You’ll never find yourself in a sticky situation.
- PSLF friendly. If you have the right kind of loans and the right employer, you can earn forgiveness through PSLF while on IBR. It might be a more desirable repayment option if you’re married.
- Marriage-friendly. With IBR, you can rest assured that you can invite Uncle Sam to the wedding without much consequence. You can control your monthly payments depending on how your file your taxes (Married Filing Separate or Married Filiing Jointly).
The Downside of Income-Based Repayment (IBR)
There are pros and cons to every repayment plan. Income-Based Repayment (IBR) is no different. Here are some hurdles I’ve seen people have with the program.
- IBR is a long-term strategy. Because monthly payments are typically lower, you’ll be paying back these loans for a lot longer. That means the Net Cost of your student loans will be substantially higher than if you were aiming to pay it off —unless you’re shooting for forgiveness.
- A potential hefty tax bill. Unless you’re trying to earn forgiveness through PSLF, forgiveness through income-driven plans like IBR is taxed as income. Earning forgiveness through this method takes careful planning because I’ve seen clients with potential tax bills as high as $60,000.
- Negative amortization. Your balance can go up despite making on-time monthly payments. Some people’s payment doesn’t cover the interest that accrues each month. This creates an “Outstanding Interest” balance that will periodically get added to your balance.
You need to certify your income. Income-driven repayment plans like IBR require that you submit documentation to prove your income. If you forget, your payments will match the 10-year Standard payments. That could double your bill for that month.
Switching to IBR isn’t a guarantee; you need to qualify. If you’re on REPAYE, your monthly payments can exceed the 10-year Standard repayment plan.
If that happens, you could find that your payments may become unaffordable and your only other repayment option would be the 10-year Standard plan.
Income-Based Repayment (IBR) is a staple repayment option. It ties your monthly payments to a percentage of your income, and for many that make those payments more manageable.
Unfortunately, there is no “one size fits all” or a “set it and forget it” repayment option. Major life events such as marriage, divorce, children, change of employer, or changes in income will affect your repayment strategy, requiring you to re-evaluate.
Identifying your most ideal repayment strategy takes a lot of thinking, planning, and oversight.
At Clear Path Financial Planning, we import student loan data directly from the source —the National Student Loan Data Systems database. We can explain the pros and cons of various strategies as it pertains to your unique situation.
Now I want to hear from you. Are you wondering if IBR is for you? If you could get one question answered, what would it be?
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