What Is Income-Based Repayment?

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Income-Based Repayment, or IBR, is a repayment plan that bases the loan payments on a percentage of the borrower’s discretionary income, as opposed to the amount owed. IBR first became available in mid-2009.

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IBR is one of four income-driven repayment plans. The others are Income-Contingent Repayment (ICR), Pay-As-You-Earn Repayment (PAYE) and Revised Pay-As-You-Earn Repayment (REPAYE). IBR generally is a good option for borrowers who don’t qualify for PAYE and who are concerned about the marriage penalty and the lack of a payment cap in REPAYE.

Eligible Loans

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IBR is available for loans in the William D. Ford Federal Direct Loan (Direct Loans) and the Federal Family Education Loan (FFEL) programs.

IBR is not available for loans in the Federal Perkins Loan program, although Federal Perkins loans can be made eligible by including them in a Federal Direct Consolidation Loan.

Federal Parent PLUS Loans are not eligible for IBR, directly or indirectly. Federal Parent PLUS loans may be eligible for ICR, if included in a Federal Direct Consolidation Loan.

Loan Payments

Monthly student loan payments in IBR are based on 15% of discretionary income, Discretionary income is defined as the amount by which adjusted gross income (AGI) exceeds 150% of the poverty line. This percentage of discretionary income is not the highest percentage of discretionary income and also not the lowest.

The monthly student loan payment under IBR is capped at the standard 10-year repayment amount. This prevents the monthly student loan payments from increasing too much as income increases.

IBR also does not have a marriage penalty. If a married borrower files federal income tax returns as married filing separately, the loan payment under IBR is based on just the borrower’s income. Otherwise, the loan payment will be based on joint income.

The minimum payment under IBR is $10 if the calculated payment is $5 or higher, otherwise it is zero.

Treatment of Interest

Student loans can be negatively amortized under IBR. This means that the loan payment is less than the new interest that accrues. Any accrued but unpaid interest is not capitalized under IBR.

The federal government pays the accrued but unpaid interest on subsidized loans for the first three years under IBR. The federal government does not pay the interest on unsubsidized loans or after the first three years under IBR.

Repayment Term and Loan Forgiveness

The maximum repayment term under IBR is 25 years (300 payments). It is the same for borrowers who have undergraduate and graduate loans. Any remaining debt is forgiven after 300 payments are made under IBR, including a calculated zero monthly payment.

If the borrower qualifies for Public Service Loan Forgiveness, the remaining debt is forgiven after 10 years’ worth of payments (120 payments).

Repayment Examples

Assuming an AGI of $30,000, the initial monthly student loan payment in IBR will be about $134 for a family of one and zero for a family of four.

This increases to about $384 and $128 for an AGI of $50,000 and to about $634 and $378 for an AGI of $70,000.

These payment examples assume a 2022 poverty line of $12,880 for a family of one and $26,500 for a family of four.

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Credit: www.forbes.com /

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