Looking for a way to get a better handle on your federal student loan payments? Then you might want to consider enrolling in the Income-Based Repayment (IBR) Plan.
IBR is a type of income-driven repayment (IDR) plan and can lower your monthly student loan payments. If your payments are unaffordable due to a high student loan balance compared to your current income, an IBR plan can provide much-needed relief.
But before signing on the dotted line, you’ll want to be sure you understand IDR plans and how they can affect your finances and student debt. This complete guide to the IBR plan will demystify this option and help you figure out if it is right for you.
What is IBR?
The term “Income-Based Repayment” is often misused as a catchall for the various IDR programs available today.
But IBR is just one of the four IDR plans offered by the Department of Education. And like other IDR plans, IBR can assist students who can’t afford their monthly federal student loan payments under the Standard Repayment Plan.
Since income-based student loan repayment falls under IDR plans, let’s first take a look at what these options have in common.
How IDR plans lower your monthly costs
The 10-year standard repayment schedule is the default for student loan borrowers, but it’s not always affordable.
High student loan balances will mean high monthly payments, which can be challenging to keep up with. Lower incomes relative to debt can also make it a struggle to cover monthly payments under the Standard Repayment Plan.
In such situations, IDR plans can be just the break you need. Instead of setting payments according to your student loan balance, the amount due each month is tied to your income. According to Federal Student Aid, such a plan is intended to make your payments affordable while taking income and family size into account.
Specifically, IDR plans set payments at a percentage of your discretionary income. For example, IBR sets payments at 10% to 15% of your discretionary monthly income, depending on when your loans were disbursed.
Your discretionary income is calculated by finding the difference between your adjusted gross income and 150 percent of the annual poverty line for a family of your size and in your state. This means your student loan payments are individualized to match your specific income, costs of living, and family size under IDR plans.
Enrolling in IBR or other IDR plans
Only federal student loans are eligible for IDR plans — not private student loans. The types of federal student loans you have might also determine the IDR plans in which you’re eligible to enroll.
Additionally, you’ll need to apply and get approved for an IDR plan before you can access these lower payments. To enroll in IBR or another IDR plan, contact your student loan servicer or request an IDR plan at StudentLoans.gov. Your servicer can direct you through its specific process of switching your loans over to an IDR plan.
Since your income is central to how your payments are set, you’ll also need to certify your income upon initially enrolling in an IDR plan. Your payments are re-evaluated and recalculated each year, so you’ll need to recertify your income annually to stay on the plan.
You can also recertify your income at will should your income suddenly change, such as after a job loss.
Comparing IDR Plans
For new borrowers on or after July 1, 2014, IBR caps payments at 10% of your discretionary income. These borrowers will also receive forgiveness after 20 years of repayment.
For borrowers who were issued their first loans before July 1, 2014, IBR limits payments to 15% of discretionary income. These borrowers will be eligible for loan forgiveness after 25 years of repayment.
To qualify, your monthly student loan payments under the IBR plan can’t equal or exceed what your payments would be under the 10-year Standard Repayment Plan.
Federal student loans eligible for IBR include:
- Direct Subsidized and Unsubsidized Loans
- Direct Graduate PLUS loans
- FFEL Consolidation Loans
- Direct Consolidation Loans
Federal student loans not eligible for IBR:
- Parent PLUS Loans
- Any other type of federal loan made to parents
- Direct Consolidation Loans that repaid loans made to parents
- Private student loans
Student loan borrowers with FFEL Program loans should note that the IBR plan is the only IDR option for which these loans are eligible.
Pay As You Earn
Pay As You Earn (PAYE) was introduced in 2012 to help borrowers better manage their student loan debt payments.
Your prospective monthly payments must be smaller than your standard payments to qualify for the PAYE plan, which is calculated at 10% of your discretionary income. The PAYE plan offers student loan forgiveness after 20 years of repayment.
To qualify for PAYE, there are specific requirements you must meet:
- You must have not have taken out a federal student loan before Oct. 1, 2007.
- You must prove that you need assistance in repaying your student loans and have received disbursement of a Direct Loan after Oct. 1, 2011.
Revised Pay As You Earn
The Revised Pay As You Earn (REPAYE) Plan was introduced in December 2015 and is the newest option for income-driven repayment plans. Direct Loans, Stafford Loans, and Graduate PLUS Loans are eligible for REPAYE, as well as other non-parent federal student loans that are consolidated into Direct Loans.
Monthly payments are set at 10% of your discretionary income. (And note that there’s no upward limit on how much those payments might be.)
Additionally, REPAYE offers student loan forgiveness after 20 years for loans originated for undergraduate studies, and 25 years for loans taken out for graduate studies.
REPAYE also includes a student loan interest subsidy that can be a huge benefit for borrowers with monthly payments that don’t cover interest charges. If they are on REPAYE, 100% of unpaid interest each month is paid for on subsidized loans. And 50% of unpaid interest is subsidized for unsubsidized student loans.
If you’ve applied for the other plans but were rejected, the Income-Contingent Repayment (ICR) Plan may be your next best option for reducing your monthly student loan payment. It’s the only IDR plan, for example, for which Parent PLUS Loans are eligible — though you will have to consolidate these loans first.
Monthly payments are set as the lesser of either 20% of your discretionary income, or monthly payments when the loan is amortized over 12 years.
ICR also offers student loan forgiveness after 25 years.
Should you switch to income-driven repayment?
There are some major benefits to enrolling in an IDR plan. But IBR and other IDR plans have some potential drawbacks as well.
Here are the central pros and cons you should be aware of as you consider enrolling in an IDR plan.
Pros of income-driven repayment plans
- Monthly payments are more manageable: All income-driven repayment plans for federal student loans can lower your monthly payments if you have low income compared to your student loan balance.
- Adjust payments when your income or family size changes: If your hours are cut or you welcome a new baby to the family, you can recertify your IDR plan. Monthly payments will be recalculated according to changes in your income and family circumstances. They can be as low as $0 if your financial situation warrants it.
- You can get student loan forgiveness: Depending on when you first borrowed and the IDR plan you choose, you can become eligible for student loan forgiveness after 20 to 25 years of on-time payments. Keep in mind, however, that the forgiven balance will likely be taxed as income for the year in which it’s forgiven.
- Take advantage of Public Service Loan Forgiveness: If you’re eligible for Public Service Loan Forgiveness, enrolling in IBR or a similar IDR can lower payments and help you maximize the benefits of this program. PSLF grants student loan forgiveness of any remaining balance after just 10 years of qualifying payments. Loans forgiven through PSLF won’t incur a tax bill, as this is not considered taxable income.
Cons of income-driven repayment plans
- Loans take longer to repay: Since you’re paying less each month, it will take longer than the typical 10 years on the Standard Repayment Plan to get out of student debt. IDR plans stretch repayment out over 20 to 25 years.
- IDR student loan forgiveness isn’t free: Under current tax laws, any remaining student loan balance forgiven as part of income-driven repayment is considered taxable income. So while you might get a large portion of your remaining balance wiped out, it could come with a sizable tax bill.
- You might pay more in interest on an IDR: Smaller payments are great for your budget — but they can cause you to end up spending more over the life of your loan. That’s because you’ll be accruing and paying interest for an additional 10 to 15 years.
- Your student loan balance could grow: If your student loan balance is very high, you might have high monthly interest charges. But under IDR, your monthly payments might not cover your interest. Interest that goes unpaid could be added to your balance and cause it to grow instead of shrink.
- Lots of paperwork: You’ll have to apply for income-based student loan repayment or IDR plans. You’ll also have to recertify your income every 12 months.
- Your choices might be limited: Not all federal student loan borrowers will qualify for or benefit from an IDR. You might be eligible only for certain plans. Other borrowers might have to consolidate federal student loans to become eligible for IDR.
- Your income might be too high to qualify: If 10 percent of your income is higher than your monthly payment on a Standard Repayment Plan, then you would not benefit from an IBR plan. If you’re married, payments might be set according to your combined income. For some income-driven plans, your student loan payment is based on the combined income and loan debt of both you and your spouse. Keep this in mind if you file a separate tax return from your spouse, or if you file one together.
Is Income-Based Repayment right for you?
Still trying to decide whether an IBR or other IDR plan is right for you? Here are a few things you should keep in mind on your budget and financial situation.
1. Estimate your monthly payment
Before settling on income-based student loan repayment, estimate what your new monthly payment will be.
Use our calculator below to view your prospective monthly payment amount. Be sure to review your budget and see if you can afford this new payment amount.
INCOME BASED REPAYMENT (IBR) CALCULATOR
2. Know the tax implications
Will you be able to pay off your student loans before the repayment term is complete? Or are you expecting to have some debt forgiven after the payment period is up?
Well, if you’re banking on student loan forgiveness, keep in mind that any forgiven debt under an income-driven plan is taxable (unless it’s through PSLF).
Be sure to discuss your tax implications with a professional so you know what to expect before applying for income-based student loan repayment.
3. Choose what’s right for you
Going for the lowest monthly student loan payment is appealing, but don’t let that sway your entire decision. Take into account all the facts and numbers before choosing IBR or a similar repayment plan.
It’s wise to choose a plan that balances both your need for affordable payments now with long-term costs and repayment.
Remember, income-based student loan repayment or another IDR plan can help you regain control of your finances without putting payments on hold. Make sure you take the time to research the best options, estimate your new monthly payment, and talk to an expert if you need more help before selecting a plan that works for you.
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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Splash Financial loans are available through arrangements with lending partners. Your loan application will be submitted to the lending partner and be evaluated at their sole discretion. For loans where a credit union is the lender, or a purchaser of the loan, in order to refinance your loans, you will need to become a credit union member.
The Splash Student Loan Refinance Program is not offered or endorsed by any college or university. Neither Splash Financial nor the lending partner are affiliated with or endorse any college or university listed on this website.
You should review the benefits of your federal student loan; it may offer specific benefits that a private refinance/consolidation loan may not offer. If you work in the public sector, are in the military or taking advantage of a federal department of relief program, such as income based repayment or public service forgiveness, you may not want to refinance, as these benefits do not transfer to private refinance/consolidation loans.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 1, 2020.
Fixed APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rate options range from 2.88% (without autopay) to 7.27% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Rates are subject to change without notice. Fixed rate options without an autopay discount consist of a range from 2.88% per year to 6.21% per year for a 5-year term, 3.40% per year to 6.25% per year for a 7-year term, 3.45% to 5.08% for a 8-year term, 3.89% per year to 6.65% per year for a 10-year term, 4.18% per year to 5.11% per year for a 12-year term, 4.20% per year to 7.05% per year for a 15-year term, or 4.51% per year to 7.27% per year for a 20-year term, with no origination fees. The fixed interest rate will apply until the loan is paid in full (whether before or after default, and whether before or after the scheduled maturity date of the loan).
Variable APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Variable rate options range from 1.99% (with autopay) to 7.10% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Our lowest rate option is shown with a 0.25% autopay discount. Our highest rate option does not include an autopay discount. The variable rates are based on the Variable rate index, is based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of April 27, 2020, the one-month LIBOR rate is 0.43763%. The interest rate on a variable rate loan is comprised of an index and margin added together. The margin is a fixed amount (disclosed at the time of your loan application) added each month to the index to determine the next month’s variable rate. Variable rate options without an autopay discount consist of a range from 2.01% per year to 6.30% per year for a 5-year term, 4.00% per year to 6.35% per year for a 7-year term, 2.09% per year to 3.92% per year for a 8-year term, 4.25% per year to 6.40% per year for a 10-year term, 2.67% per year to 4.56% per year for a 12-year term, 3.44% per year to 6.65% per year for a 15-year term, 4.75% per year to 6.93% per year for a 20-year term, or 5.14% per year to 7.10% for a 25-year term, with no origination fees. APR is subject to increase after consummation. Variable interest rates will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. The maximum variable rate may be between 9.00% and 16.00%, depending on loan term. The floor rate may be between 0.54% and 4.21%, depending on loan term. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of June 23, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.18% effective July 10, 2020.