Income Based Repayment Plan

Income-based repayment is intended as an alternative to income sensitive repayment (ISR) and income contingent repayment (ICR). It is designed to make repaying education loans easier for students who intend to pursue jobs with lower salaries, such as careers in public service. It does this by capping the monthly payments at a percentage of the borrower's discretionary income, which is based on the borrower's income and family size. The monthly payment amount is adjusted annually, based on changes in annual income and family size.

Most borrowers will have a monthly payment under income-based repayment that is less than 10% of gross income. This includes single borrowers with less than $50,000 in income and married borrowers with two children who have less than $100,000 in income.

Income-based repayment is only available for federal student loans, such as the Stafford, Grad PLUS and consolidation loans. It is not available for Parent PLUS loans or for consolidation loans that include Parent PLUS loans. It is also not available for private student loans.

Income-based repayment caps monthly payments at 15% of your monthly discretionary income, where discretionary income is the difference between adjusted gross income (AGI) and 150% of the federal poverty line that corresponds to your family size and the state in which you reside. There is no minimum monthly payment. Unlike income-contingent repayment, which is available only in the Direct Loan program, income-based repayment is available in both the Direct Loan program and the federally-guaranteed student loan program, and loan consolidation is not required.

For example, consider a single borrower earning $30,000 a year with $40,000 in federal education loans. Using the 2009 poverty line of $10,830 for the continental US, the monthly payment cap under income-based repayment will be 15% * ($30,000 - 150% * $10,830) / 12 = $171.94 a month. Under income-contingent repayment the monthly payment is 20% * ($30,000 - 100% * $10,830) / 12 = $319.50. This compares with $277.63 under extended 25-year repayment and $460.32 a month under standard 10-year repayment.

The maximum repayment period is 25 years. After 25 years, any remaining debt will be discharged (forgiven). Under current law, the amount of debt discharged is treated as taxable income, so you will have to pay income taxes 25 years from now on the amount discharged that year. But the savings can be significant for students who wish to pursue careers in public service.

A new public service loan forgiveness program will discharge the remaining debt after 10 years of full-time employment in public service. Unlike the 25-year forgiveness, the 10-year forgiveness is tax-free due to a 2008 IRS ruling. The borrower must have made 120 payments as part of the Direct Loan program in order to obtain this benefit. Only payments made on or after October 1, 2007 count toward the required 120 monthly payments. (Borrowers may consolidate into Direct Lending in order to qualify for this loan forgiveness program starting July 1, 2008.)

For a typical law school graduate pursuing a career as a public defender, the annual income is about $40,000 and the total federal education debt is $120,000. The monthly payments under income-based repayment will be 8.9% of monthly income, compared with 11.9% under income-contingent repayment, 23.5% under 30-year repayment and 41.4% under standard 10-year repayment. After working as a public defender for ten years all the remaining debt would be forgiven, including the original $120,000 loan balance and more than $30,000 in accrued but unpaid interest. This makes it possible for public-spirited students to pursue lifelong careers in public service despite the high debt and low salaries.

In addition to discharging the remaining balance at the end of 25 years (10 years for public service), the IBR program also includes a limited interest subsidy benefit. If your payments don't cover the interest that accrues, the government pays or waives the unpaid interest (the difference between your monthly payment and the interest that accrued) on subsidized Stafford loans for the first three years of income-based repayment.

The IBR program is best for students who will be pursuing public service careers and borrowers with high debt and low income (e.g., a debt-to-income ratio of 1.0 or higher for single borrowers). Having a large household size also helps. Borrowers who have only a temporary income shortfall may be better off seeking an economic hardship deferment.

Students who are not pursuing careers in public service may be intimidated by the thought of a 25-year repayment term. However, it is worth careful consideration, especially by students who might be considering using an extended or graduated repayment plan. IBR will likely provide the lowest monthly payment for many low income borrowers and certainly is a reasonable alternative to defaulting on the loans.

Generally, a debt-to-income ratio of 1.5 or more will result in forgiveness after 25 years except for borrowers with six figure incomes, and a debt-to-income ratio of 1.0 or more will result in forgiveness after 10 years.

Calculating the cost of a loan in the IBR program can be somewhat complex, in part due to the need to make assumptions about future income and inflation increases. The Department of Education provides a powerful Income-Based Repayment Calculator that lets you compare the IBR program with standard and extended repayment. You can compare the costs under a variety of scenarios, including the possibility of starting off with a lower income and later switching to job with a higher salary.

The IBR calculator also computes the net present value of the total payments, telling you how much they would cost in constant dollars. The idea is that a dollar ten years from now will have less buying power than a dollar today, due to inflation. Net present value tells you how much that dollar would be worth today, under certain assumptions. Comparing different loans using constant dollars can provide a more realistic analysis of the difference in real cost.

When comparing the IBR program with the standard and extended repayment programs, it is important to recognize that the loan term has a significant impact on loan cost. Although net present value figures allow you to compare costs on a constant dollar basis, comparing the cost of a 10 year loan with a 25 year loan is like comparing apples and oranges. A 10 year loan will likely have a lower overall cost than a 25 year loan, primarily because of the shorter loan term. For example, consider a student with a $72,000 loan and an AGI of $40,000. Under the IBR program, the net present value is $77,940.78. Under the standard repayment program, the net present value is $76,074.74. So the standard repayment program is slightly less expensive than the IBR program. However, it would be a mistake to conclude from this that the extended repayment program with a 25 year loan term is better than the IBR program, because the relative costs change as the loan term increases. The 25-year extended repayment program turns out to have a net present value of $80,743.06, more expensive than the IBR program.

The marriage penalty inherent in the IBR formula was corrected by Congress (P.L. 110-153, December 21, 2007) by allowing a married borrower who files income tax returns as "married filing separately" to count only the borrower's adjusted gross income and student loan debt. This lets a borrower exclude the (higher) income of his/her spouse when calculating the cap on monthly payments under income-based repayment instead of combining the income as under the original legislation.

An important feature of the government's IBR program is that although you must initially sign up for 25-year income-contingent repayment, you are not locked into this payment plan. If your circumstances change or if you just decide that you want to pay off your loan more rapidly, you may do so. (Borrowers who switch into Direct Lending in order to obtain public service loan forgiveness are limited to the IBR, ICR and standard repayment plans.)

FFELP Income-Based Repayment (IBR) Plan Application
Complete this form for initial determination of your eligibility to repay eligible FFELP loans under the IBR plan or for the required annual reevaluation of eligibility to pay under the IBR plan.

Request for Transcript of Tax Return
Complete this form to designate your loan holder to receive certain federal tax information from the Internal Revenue Service (IRS) to determine eligibility for Income-Based Repayment (IBR) Plan. Complete this form if you did not file a tax return.

FFELP Income-Based Repayment (IBR) Plan Alternative Documentation of Income
Complete this form if:

• You want to repay your eligible FFELP loans under the IBR plan and your AGI, as reported on your most recently filed federal tax return, does not reasonably reflect you current income.

• You want to repay your eligible FFELP loans under the IBR plan and you have not been required to file a federal tax return.

• You want to repay your eligible FFELP loans under the IBR plan and you did not file a federal tax return.

• You have been notified that the Internal Revenue Service (IRS) is unable to provide your loan holder with your Adjusted Gross Income (AGI).

• You are repaying your eligible FFELP loans (s) under the IBR Plan and your AGI, as reported on your most recently files federal tax return, does not reasonably reflect your current income and ability to repay your loan (s) in circumstances such as loss or change of employment.