What Is IBR and How Does It Work?

FT Contributor
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Income-Based Repayment, often known by the acronym IBR, is a type of income-driven repayment (IDR) plan that helps you manage your monthly student loan payments. Sometimes, the term IBR is used to refer to all income-driven repayment plans. However, in the context of the Department of Education’s federal student loan repayment programs, IBR is one of the four income-driven repayment plans.

Just like other IDRs, IBR plans provide relief to students trying to pay back their student loans but struggling with the monthly payments or the standard payback period.

How to Calculate Your IBR Payments

The specifics of an IBR payment plan vary depending on the date when you first took out your student loans. If the lender disbursed your loans before July 1, 2014, then monthly payments will not exceed 15% of your discretionary income, and any outstanding balance after 25 years gets forgiven as long as you always make monthly payments on time.

If you took out a loan after July 1, 2014, then your monthly payments will be capped at 10% of your discretionary income, and the Department of Education forgives the remaining money owed after 20 years.

An Example of Calculating Monthly IBR Payments

To calculate your discretionary income, you need to multiply the poverty line amount in your state by 1.5. Then, you subtract the result from your household income. The poverty level will depend on the size of your household. In the state of Illinois, for example, the poverty line for a family of four is $25,570. So, if you have a household size of four and earn $45,000 a year, you would calculate your discretionary income like this:

  • Multiply the state poverty level by 1.5 ($25,570 times 1.5 equals $38,355);
  • Subtract the result from your income ($45,000 minus $38,355 equals $6,645).

$6,645 is your discretionary income.

If you took out your loans before July 1, 2014, then you will pay 15% of $6,645, which is $996.75 or $83.06 monthly. If you took your loans on or after July 1, 2014, then you will pay 10% of your discretionary income, which is $645.4 or $55.45 monthly.

Technically, you could qualify for $0 monthly payments if your discretionary income is $0. However, there is no cap on monthly payment amounts, so if your income increases, your payments will also increase.

You can calculate your monthly payments and eligibility with the online IBR calculator provided by the Department of Education.

Student Loan Forgiveness With IBR

If you pay on time every month, your remaining loan balance may be forgiven as part of an IBR plan. If your loan originated before July 1, 2014, then the period for loan forgiveness is 25 years. However, if your loan began after that date, you only have to wait 20 years to achieve loan forgiveness.

If you’re eligible for Public Service Loan Forgiveness (PSLF), then you can still participate in this program while on an IBR plan. With PSLF, you may be eligible for earlier loan forgiveness. You qualify for PSLF if you work in an approved public service organization or nonprofit.

PSLF covers remaining loan balances  after you make 120 eligible payments. The terms require 10 years of full monthly payments made on time, every time.

Requirements to Qualify for IBR

To qualify for the 10% cap on monthly payments and loan forgiveness after 20 years, you need to have started your loan on or after July 1, 2014. If you took out loans before July 1, 2014, then you qualify for a 15% cap on payments and loan forgiveness after 25 years.

Your payments as part of an IBR plan cannot be equal to or more than what you would have to pay with the 10-year Standard Repayment Plan.

Eligible loans include Direct Subsidized and Unsubsidized Loans, Direct Gradual Loans, Direct Consolidation Loans, and Federal Family Education Loans (FFEL). IBR is the only one of the four Department of Education income-driven repayment programs that accepts FFEL loans.

Ineligible loans include Parent PLUS Loans or any other type of federal loan made to parents of students. Direct Consolidation Loans taken out to repay loans made to parents are also ineligible. Private student loans do not qualify for the IBR or any other IDR.

Benefits of IBR

Monthly IBR payments are manageable because they are a percentage of your income. People can start their career with an entry-level job and not have to worry about excessively high monthly payments.

You update your income during an annual recertification process. This process makes it possible to adjust your payment plan as you go. In addition to salary changes, payments could adjust because of marriage, children, or other life changes.

Student loan forgiveness is another benefit of IBR plans. It will take 20 or 25 years, but you can be sure that student loans will not turn into lifelong debt.

This income-driven repayment plan also allows you to take advantage of the Public Service Loan Forgiveness, which will enable you to access loan forgiveness after a shorter period (10 years) without having to pay tax on the forgiven amount.

How to Apply for IBR

You can enroll in an Income-Based Repayment plan through your student loan servicer or online via StudentLoans.gov. Your loan servicer will typically guide you through the process of registering for an IBR plan or other IDR plan.

If you decide to enroll via StudentLoans.gov, you will need to follow specific steps:

Visit your student loans portal and log in with your Federal Student Aid ID.

Select “income-driven repayment plan request.” You can choose to complete a “Demo,” which will help you get the documents and financial figures that you need to complete the actual application.

After you collect the necessary information, you can log in and complete the application process online.

You can manually select an IBR plan. However, if you qualify for multiple IDRs, you will automatically get placed in the program that offers the lowest payment.

Should You Use IBR?

Whether the IBR is right for you or not depends on your circumstances. This plan is a good option for those whose income is low compared to their student loan balance. For example, people who are just starting their careers and only have an entry-level job may benefit from this program.

Payments get adjusted according to changing income and family size. As long as the required payments do not equal or exceed what you would have paid under the Standard Repayment Plan, an IBR is the right choice.

You may also want to consider the tax implications of an IBR plan. You will enjoy loan forgiveness after 20 or 25 years with IBRs, but the amount that gets forgiven may get taxed as income.

The timeframe for your loan repayment can also be a factor. If you want to pay off your loan as soon as possible, 20 to 25 years may be too long for you.

If you are part of a PSLF program or if you have FFEL loans, the IBR is often your best option.

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