IBR (I Be Ready) for Income-Based Repayment

I be ready for IBR. I must be ready, since this is the payment plan I am under. I also hope you are ready, since this is a very long post! IBR is a becoming a very popular repayment program among recent and upcoming graduates. In many ways, it is friendlier and offers more benefits than ICR.

First, I should clarify some things about IBR. According to studentloans.gov, there are actually two types of IBR programs: traditional IBR and new IBR. Traditional IBR is for those who are NOT new borrowers as of July 1, 2014. New IBR is for those who are new borrowers as of July 1, 2014. Per studentloans.gov, “you are a new borrower if you have no outstanding balance on a William D. Ford Federal Direct Loan (Direct Loan) Program or Federal Family Education Loan (FFEL) Program loan when you received a Direct Loan on or after July 1, 2014.” Essentially, if you didn’t have any federal loans before July 1, 2014 and begin borrowing on or after July 1, 2014, then you qualify for new IBR. I’ll be discussing that in the next post.

Here’s the breakdown on traditional (not “new” IBR) Income-Based-Repayment.

*The monthly payment amount is about 15% of your discretionary income, but never more than the 10-year Standard Repayment Plan. Payments are calculated based upon your income (AGI) and family size. Your overall loan balance does not factor into your monthly payments.

*Your discretionary income is, “or Income-Based Repayment and Pay As You Earn, discretionary income is the difference between your income and 150 percent of the poverty guideline for your family size and state of residence. For Income-Contingent Repayment, discretionary income is the difference between your income and 100 percent of the poverty guideline for your family size and state of residence. The poverty guidelines are maintained by the U.S. Department of Health and Human Services and are available at www.aspe.hhs.gov/poverty.”

*Adjusted Gross Income (AGI) is, “your or your family's wages, salaries, interest, dividends, etc., minus certain deductions from income as reported on a federal income tax return.”

*Payments are made for 25 years, after which point the remaining balance is forgiven. Currently, the forgiven amount is considered as taxable income.

*The following loan types are eligible for IBR: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct Plus Loans made to graduate and professional students, Direct Consolidation Loans that did not repay any PLUS loans made to parents, Subsidized Federal Stafford Loans (from FFEL program), Unsubsidized Federal Stafford Loans (from FFEL program), FFEL PLUS Loans made to graduate or professional students, FFEL Consolidation Loans that did not repay any PLUS loans made to parents, Federal Perkins Loans (only if consolidated!).

*You can apply online for IBR at studentloans.gov, or with a paper application provided by your loan servicer. The online option is the quickest and easiest….I also wouldn’t necessarily trust some loan servicers.

*You must submit yearly information about your income in the form of a tax return or through alternative documentation (such as pay stubs). If you do not submit this paperwork annually, you will be put on the Standard Repayment Plan until the documentation is received and processed.

*In order to be eligible for IBR, you must have a partial financial hardship. This is “an eligibility requirement for the Income-Based Repayment (IBR) and Pay As You Earn plans.
For IBR, a circumstance in which the annual amount due on your eligible loans, as calculated under a 10-year Standard Repayment Plan, exceeds 15 percent of the difference between your adjusted gross income (AGI) and 150 percent of the poverty line for your family size in the state where you live.
For Pay As You Earn, a circumstance in which the annual amount due on your eligible loans, as calculated under a 10-year Standard Repayment Plan, exceeds 10 percent of the difference between your adjusted gross income (AGI) and 150 percent of the poverty line for your family size in the state where you live.
For both plans, the amount that would be due under a 10-year Standard Repayment Plan is calculated based on the greater of the amount owed on your eligible loans when you originally entered repayment, or the amount owed at the time you selected the IBR or Pay As You Earn plan.”

So, that is a lot to read and take in. I get it. I thought about breaking a discussion of IBR into chunks, but that would fragment the information. I’ll go into greater depth about various aspects of IBR in later posts. In summary, IBR is a good option for those with high amounts of debt relative to their income. If you have a partial financial hardship as defined above, and have the right type of loans, you may apply for the program. IBR also can work in conjunction with Public Service Loan Forgiveness (another huge topic, another post). Here is an example of how IBR can work:

1.     With a total debt burden of $100,000.00 and an interest rate of 6.8%, the Standard Repayment would be $1,151.00 per month for a total of 120 months. The total paid would be $138,096.00. In this scenario, one pays $38,096.00 in interest over the life of the loan.

Under IBR, the monthly payments would be lower. With an AGI of $45,000 and a family size of 1, the first payments would be $344.00 per month. Assuming an increase in income of 5% per year and a 3.3% poverty line increase (also annually), the final payments will be $1,151.00. Payments are made for 25 years. The total amount paid is $218, 372.00. The amount of interest paid is $118, 372.00. The projected forgiveness amount is $37,066.00.

IBR costs a great deal more money than Standard Repayment over time. I encourage you to go to the following site to play with the repayment calculators.

https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action

You can estimate your loan amount or sign in and use your actual loan balance for the calculations. Your payments will go down as your family size increases, and they will go up as your income increases. There are too many variables to address in this post.

There are some other benefits to IBR. In addition to the lower monthly payment, you can:

1.     Have your own income alone count towards IBR, or include your spouse’s income. If you file your taxes married filing separately, only your income will be used to calculate your monthly payment. You will likely lose out on some tax benefits if you file separately instead of married filing jointly.

2.     You can always pay more than your monthly payment if you want to pay the loan down more quickly.

3.     The government will pay the interest on your subsidized loans for up to three consecutive years if your payments do not cover interest.

4.     You may also qualify for Public Service Loan Forgiveness while under IBR.

5.     If you are unemployed or have a very low income, your IBR monthly payment may be calculated at $0.00. These “payments” still count towards the 25 years of payments until forgiveness.

There is much more to IBR. I will cover the various pros and cons in more depth in future posts. If you cannot afford your student loan payments, then consider IBR instead of deferment or forbearance. Do some research, play with the calculators, and consider what is best for you.