Note that the situation for student loans has changed due to the impact of the coronavirus outbreak and relief efforts from the government, student loan lenders and others. Check out our Student Loan Hero Coronavirus Information Center for additional news and details.
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Income-Based Repayment is a type of income-driven repayment (IDR) plan that 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 Income-Based Repayment (IBR) plan can provide much-needed relief.
But before signing on the dotted line, you’ll want to understand IDR plans and how they can affect your finances and student debt. This guide to IBR will demystify this option and help you figure out if it’s right for you. To do so, we’ll answer these questions:
- What is Income-Based Repayment?
- How does IBR compare to other income-driven repayment plans?
- Should you switch to income-driven repayment?
- Is Income-Based Repayment right for you?
The term “Income-Based Repayment” is often misused as a catch-all for the various IDR programs available today.
But Income-Based Repayment 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 federal 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 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% of the annual poverty line for a family of your size and in your state. This means your student loan payments under IDR plans are individualized to match your…
- Costs of living
- Family size
Enrolling in Income-Based Repayment 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 Income-Based Repayment or another IDR plan, contact your student loan servicer or request an IDR plan via StudentAid.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 reevaluated 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.
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 Income-Based Repayment plan is the only IDR option for which these loans are eligible.
Pay As You Earn (PAYE)
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 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 (REPAYE)
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 capped at 10% of your discretionary income. But there’s no cap on monthly payments.
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 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.
There are some major benefits to enrolling in an IDR plan. But Income-Based Repayment 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 with 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. And through at least 2025, forgiven amounts won’t be subject to federal income tax, thanks to COVID-19-era legislation.
- Take advantage of Public Service Loan Forgiveness: If you’re eligible for Public Service Loan Forgiveness, enrolling in Income-Based Repayment 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.
- You might pay more interest with IDR: Smaller payments are great for your budget — but you could 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% of your income is higher than your monthly payment on a standard repayment plan, then you would not benefit from the Income-Based Repayment plan. If you’re married and using IDR, 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.
Still trying to decide whether Income-Based Repayment or another IDR plan is right for you? Here are a few things you should keep in mind with your budget and financial situation.
1. Estimate your monthly payment
Before settling on Income-Based 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
We also have a suite of student loan calculators for other repayment plans and strategies.
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?
If you’re banking on student loan forgiveness, keep in mind that any forgiven debt under an income-driven plan has been taxable historically (besides PSLF). It’s unclear if tax-free forgiveness included in student loan stimulus relief will be around past Jan. 1, 2026.
If you won’t be reaching forgiveness until well past that date, discuss your tax implications with a professional so you know what to expect before applying for Income-Based Repayment.
3. Choose what’s right for you
Remember, Income-Based Repayment or another IDR plan can help you regain control of your finances without putting payments on hold. Take the time to research the best options and estimate your new monthly payment, before selecting a plan that works 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 your need for affordable payments now with long-term costs and repayment. Before proceeding, read further about choosing the best student loan repayment plan for your situation.
Andrew Pentis contributed to this report.
Interested in refinancing student loans?Here are the top 9 lenders of 2021!
|Lender||Variable APR||Eligible Degrees|
|1.88% – 6.15%1||Undergrad & Graduate|
|1.88% – 5.64%2||Undergrad & Graduate|
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|2.50% – 6.85%4||Undergrad & Graduate|
|2.25% – 6.39%5||Undergrad & Graduate|
|1.90% – 5.25%6||Undergrad & Graduate|
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|2.39% – 6.01%||Undergrad |
|2.13% – 5.25%8||Undergrad & Graduate|
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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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 June 1, 2021.
2 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 2.50% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.88% 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 October 26, 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 10/26/2020. 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.
3 Important Disclosures for Navient.
4 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. 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 0.15% effective Jan 1, 2021 and may increase after consummation.
5 Important Disclosures for SoFi.
6 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 04/07/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.
7 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 April 29, 2021. Information and rates are subject to change without notice.
8 Important Disclosures for PenFed.
Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.13%-5.25% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. 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.