What is income based repayment?

This is one of three hardship-based programs offered by the federal government to provide student debt relief. Monthly payments are matched to your income and family size so it’s easier to meet your obligations on a tight budget. In most cases, payments average out to about 15% of your Adjusted Gross Income (AGI), depending on your family size. An IBR is also one of the programs you can use to qualify for Public Service Loan Forgiveness.

What types of debt can I include?

You can include any combination of the following federal student loans in an IBR:

  • Direct student loans, subsidized and unsubsidized
  • Stafford loans, subsidized and unsubsidized
  • PLUS loans (Direct or FFEL) for graduate students
  • Direct and FFEL Consolidation Loans (as long as they don’t include a PLUS loan to parents)
  • Federal Perkins Loans (only eligible once consolidated)

As you can see, in some cases you may need to consolidate first in order to qualify. In other words, you must use a Federal Direct Consolidation Loan to consolidate the debt first. Then those debts to become eligible for repayment under an IBR.

You cannot use income based repayment to consolidate any private student loan debt.

How an IBR works

  1. First, you must decide which debts you want to include in the program, since you are not required to include all of your debt.
  2. In many cases, you will first need to consolidate with a Federal Direct Consolidation Loan in order to ensure all of your debts are eligible
  3. Program payment amounts are based on your Adjusted Gross Income (AGI) and family size.
    1. The monthly payment must be lower than what you would pay under a Standard Repayment Plan in order to qualify
  4. The term of the plan will generally be longer than 10 years, but less than 25 years – in most cases the term will be between 20-25 years.
    1. After 25 years, if you still have any outstanding balance that has not been paid, it’s forgiven without penalties.
    2. If you work in a qualified public service sector, such as teaching or nursing, you can qualify for Public Service Loan Forgiveness to erase your balances after 10 years.
  5. The interest rate is set as a weighted average of the rates on the loans included.
  6. You payments remain fixed at the amount set at the start of your plan for 1 year.
  7. Each year, you must “recertify” to have your AGI and family size reassessed to determine your new monthly payment amount.

Advantages and Disadvantages of Using an IBR

Income based repayment provides two main benefits:

  1. Since the monthly payments are matched to your income level and family size, the programs fits better into your budget so you’re not struggling to keep up.
  2. If you’re a public servant, like a firefighter or teacher, you can use this program to qualify for Public Service Loan Forgiveness.

Of course, there are some tradeoffs:

  1. Since the program can run up to 25 years, you can significantly increase the total interest charges applied to your debt – so you end up paying more over time
  2. You have to recertify every year or you won’t be eligible.