Student Loan Income Based Repayment

Q: Are my Federal Stafford Loans eligible for income based repayment?

A: Eligibility is determined by your loan provider. Income Based Repayment (IBR) is a new repayment plan for the major types of federal loans made to students. Under IBR, your required monthly payment is capped at an amount that is intended to be affordable based on your income and family size.

Am I eligible for Income Based Repayment?
You may enter IBR if your federal student loan debt is high relative to your income and family size. While your lender will perform the calculation to determine your eligibility, you can use the Income Based Repayment calculator at studentaid.ed.gov to estimate if you would likely benefit from the IBR plan. It looks at your income, family size, and state of residence to calculate your IBR monthly payment amount. If that amount is lower than the monthly payment under a 10-year standard repayment plan, then you are eligible to repay your loans under IBR.

The following chart shows the maximum IBR monthly payment amounts for 2009 for a sample range of incomes and family sizes.
What student loans are eligible for Income Based Repayment?
Any Stafford, Grad PLUS or Consolidation loan made under either the Direct Loan or FFEL program is eligible for repayment under IBR, EXCEPT loans that are currently in default, parent PLUS Loans, or consolidation loans that repaid a parent PLUS Loan. The loans can be new or old, and for any type of education (undergraduate, graduate, professional, job training).

What are the benefits of Income Based Repayment?
PAY AS YOU EARN: Under IBR, your monthly payment amount will be less than the amount you would be required to pay under a 10-year standard repayment plan, and may be less than under other repayment plans. Although lower monthly payments may be of great benefit to a borrower, these lower payments may result in a longer repayment period and additional interest.

INTEREST PAYMENT BENEFIT: If your monthly IBR payment does not cover the monthly interest that accrues on the loans, the government will pay your unpaid interest on Subsidized Stafford Loans (either Direct Loan or FFEL) for up to three consecutive years from when you first enter IBR repayment. After three years, and for all the other types of loans, interest that accrues will be capitalized (added to the loan principal on which future interest is calculated) when the borrower no longer is eligible for an IBR repayment amount.)

25-YEAR CANCELLATION: If you repay under the IBR plan for 25 years and meet certain other requirements, any remaining balance will be cancelled.

10-YEAR PUBLIC SERVICE LOAN FORGIVENESS: If you work in public service and have reduced loan payments through IBR, your remaining balance after ten years in a public service job could be cancelled if you made loan payments for each month of those ten years. The Public Service Loan Forgiveness Program is available only if you have Direct Loans and you make 120 monthly payments under the Direct Loan Program. If you have FFEL loans, you may be eligible to consolidate them into the Direct Loan Program to take advantage of the Public Service Loan Forgiveness Program. However, only the payments made while in the Direct Loan Program will count toward the required 120 monthly payments.

What are the disadvantages of Income Based Repayment?
YOU MAY PAY MORE INTEREST: The faster you repay your loans, the less interest you pay. Because a reduced payment in IBR generally extends your repayment period, you may pay more total interest over the life of the loan.

YOU MUST SUBMIT ANNUAL DOCUMENTATION: To set your payment amount each year, your lender needs updated information about your income and family size. If you do not provide the documentation, your payment reverts to the standard 10-year repayment amount.

How is the IBR amount determined?
Under IBR, the amount an eligible borrower would repay each month is based on the borrower Adjusted Gross Income (AGI) and family size. The annual IBR repayment amount is 15 percent of the difference between the AGI (or an alternate income amount) and 150 percent of the Department of Health and Human Services Poverty Guidelines, adjusted for family size. That amount is then divided by 12 to get the monthly IBR repayment amount. If that amount is higher than the 10-year standard repayment amount on the loans, then the required payment is the standard amount. The repayment amount under a 10-year standard plan is calculated based upon the total amount borrowed and the applicable interest rate applied over 10 years. (Unlike the IBR plan, the repayment amount under a 10-year standard plan is not based on your annual income.)

Q: Are private student loans eligible for income based repayment?

A: Income based repayment for private student loans is usually not available. However, it is likely that you have other options that may reduce or temporarily stop your private student loan payments. Call your lender or the servicing company that handles your payments, and ask about all of your repayment options. Also ask about deferment and forbearance which may temporarily halt your repayment. You may also wish to learn more about Private Student Loan Consolidation which can combine your private loans and offer you a reduced monthly payment.