Income-Based Repayment of Student Loans
In 2011, American students who graduated college had an average student loan debt of $27,200. In the same year, current students borrowed $112 billion to help finance their undergraduate and graduate educations. Today, the outstanding student loan debt in the United States is more than $1 trillion.
(Related reading: How to Find Money For School Before Taking Out Student Loans.)
The standard repayment schedule for federal student loans is 10 years, but there have always been many options available to indebted students struggling to repay their loans, including consolidation, forbearance, deferment and loan forgiveness. Recently, the government has tried to make repayment even easier for responsible student loan borrowers. The College Cost Reduction and Access Act (CCRAA) became effective on July 1, 2009. One of the act’s components is the Income-Based Repayment (IBR) Plan.
(Related reading: Which Student Loan Repayment Plan is Right For Me?)
IBR payments are based on income, family size and residence, and not on the amount borrowed. Originally they were capped at 15% of a borrower’s discretionary income, but in October 2011, President Obama issued an executive order that will lower the cap to 10% by the end of 2012. So far, more than 232,000 borrowers have enrolled in the plan.*****
*****UPDATE!!! On October 27, 2015, the Department of Education announced a new REVISED Pay A You Earn plan (REPAYE) that helps ease the student loan debt burden by limiting payments to 10% of a borrower's income. You can read more about the regulation here.
Use our IBR calculator to quickly calculate your estimated federal student loan repayments based on the Income Based Repayment Plan.
Types of Student Loans
The three basic types of student loans are: federal loans made directly by the government; federal loans made by banks or other lenders that are guaranteed by the government; and private loans made by banks and other companies.
The most popular federal loan is the Stafford loan, which is available to students regardless of financial need and can be obtained either from the government directly or from a private lender. For students who have sufficient financial need, their Stafford loans can be subsidized, meaning the federal government will pay the interest on the loan while they are in college. Unsubsidized Stafford loans accrue similar interest but must be repaid by the student.
Perkins loans are federal loans made to students who have the greatest financial need. They are always subsidized and have a fixed interest rate of 5%.
Other federal loans are PLUS loans. Parent PLUS loans are available for parents of dependent undergraduate students, and Grad PLUS loans are for graduate students. They are funded directly by the federal government, have a fixed interest rate of 7.9%, and have no borrowing limit.
(Related video: iGrad Guide: How to Access Your Student Loans and Grants.)
Income-Based Repayment Plan Eligibility
Some loans are eligible for IBR and some are not. This handy chart breaks down which are eligible and which are not:
|IBR-Eligible Loan Types||Non-Eligible Loans|
|√||Direct Subsidized Loans||PLUS loans made to parents||X|
|√||Direct Unsubsidized Loans||Consolidation Loans that include underlying PLUS loans made to parents||X|
|√||Direct (or FFEL) PLUS Loans made to graduate or professional students||Private Education Loans||X|
|√||Direct (or FFEL) Consolidation Loans without underlying PLUS loans made to parents|
|√||Subsidized Federal Stafford Loans|
|√||Unsubsidized Federal Stafford Loans|
(Related reading: What Every Student Should Know About Loan Consolidation.)
To qualify for IBR, a borrower must demonstrate a “partial financial hardship.” A formula using adjusted gross income (AGI), family size and state of residence will determine how much a borrower is able to pay. If that amount is less than the monthly amount required under the standard 10-year repayment plan, that student would be eligible for IBR. If a borrower’s AGI is less than 150% of the federal government’s established poverty line, the monthly payment under IBR is zero.
In addition, if a monthly IBR payment doesn’t cover the loan’s interest, the federal government will pay the unpaid accrued interest on a subsidized Stafford loan for up to three years from the time an IBR plan is implemented.
Every year, borrowers repaying under IBR must resubmit documentation of income and family size to their lender(s). Payments will then be adjusted to conform to any new information. In addition, if income changes radically during the year, a borrower can apply for a recalculation of the monthly repayment amount.
While an IBR plan will save a borrower money in the short term, there is one drawback: since the repayment period can be extended up to 25 years (changing to 20 years under the president’s order) a borrower will end up paying more in interest due to the extended payback time frame.
However, if the loan is not repaid by the end of the extension period, the remaining debt and interest will be forgiven. Also, if a borrower works in various public-service professions and makes payments under an IBR plan, their loan(s) may be forgiven after only 10 years of on-time, full monthly payments.
The Department of Education and various other websites provide IBR loan calculators, detailed information on IBR eligibility, guidelines for married borrowers, application procedures and other information. Borrowers are also advised to contact their loan-service company for specifics on the Income-Based Repayment Plan.
(Download Income-Based Repayment Plan paperwork here.)
Al Krulick is an award-winning writer with a background that includes theater, non-profit administration, journalism, and politics. He received his B.A. in Communications from the State University of New York in Binghamton and has worked as a drama critic and political columnist. He is a two-time Congressional candidate from Central Florida and has been a speech writer and field director for many political campaigns. Currently he is a Certified Debt and Credit Counseling Specialist for Debt.org, who contributes articles on Debt Settlement, Small Business Finance, Veterans’ Issues, and Student Loans.
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