The Income Based Repayment Program for Student Loans (IBR)

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What is the Income Based Repayment (IBR) Program for Student Loans?

The Income Based Repayment Program (IBR) for student loans is a Federal program for college graduates that went into effect July 1st, 2009. Under the IBR program, loan payments are based on the income and family size of the borrower.

For many graduates, this program can lower their monthly student loan payment by hundreds of dollars. It is important to note however, that a lower monthly payment may actually cause the total amount paid over the life of the loan to be more than under the standard 10-year plan.

The Income Based Repayment (IBR) program is not the first of its type. The Income Sensitive and Income Contingent repayment plans are also offered by the Department of Education, with slightly different formulas and features.

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Advantages of the Income Based Student Loan Repayment Program

The Income Based Student Loan Repayment Program (IBR) offers a number of key benefits to graduates struggling to repay their student loans. While these benefits are sizable, a borrower must also be sure to consider the disadvantages.

IBR Benefit #1 - Lower Monthly Payments
The IBR program may substantially lower a graduate's monthly student loan payment. The calculation of the actual amount is based on a formula that considers the student's adjusted gross income level, the Federal poverty line, and the number of people the graduate financially supports.

To estimate what your student loan payment would be under the Income Based Repayment program (IBR), visit the Department of Education's online IBR calculator.

IBR Benefit #2 - Student Loan Forgiveness
Under the Income Based Repayment program, balances not paid off after either 10 or 25 years are forgiven by Department of Education. While all borrowers can qualify for student loan forgiveness after 25 years, the 10-year forgiveness feature is reserved for those who have worked full-time in public service.

IBR Benefit #3 - Student Loan Interest Subsidy
If your newly calculated IBR payment doesn't cover the interest that is added to your subsidized Stafford loan, the government will pay the difference for your first three years in the IBR program. After that, the unpaid interest is added to your loan balance.

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Disadvantages of the Income Based Student Loan Repayment Program (IBR)

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There are two primary disadvantages to the Income Based Student Loan Repayment Program. One is simply a hassle, while the other could hypothetically cost you thousands of dollars.

IBR Disadvantage #1 - Increased Interest Over the Life of the Loan
Perhaps the biggest drawback to the IBR program is that the lower monthly payments do not pay down a borrower's loan balance as fast. This leads to more interest being added to the account each month, which in turn extends the amount of time it takes to pay it off. In other words, when you do the math, the IBR program could actually end up costing you far more than you save.

Graduates considering the IBR program should look at the total costs over the life of the loan under both the IBR and other repayment programs. Graduates who have higher levels of disposable income and who will not qualify for the 10-year loan forgiveness provision should consider sticking with the traditional repayment plan.

IBR Disadvantage #2 - Annual Paperwork
For those graduates hoping to lock in a low rate under the IBR program prior to their income going up, there's bad news. Graduates actually have to verify their income every year under the IBR program, which means the payment will be adjusted upward to take into account a rising income.

One potential pitfall will be for graduates who have a high income year followed by a low income year. In this case, they may have a higher than tolerable payment locked in during a year when their income may not be able to support it.

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Which Students and Loans Are Eligible for the Income Based Repayment Program?

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While eligibility for the Income Based Repayment Program for student loans is fairly broad, there are still some classes of students and loans that cannot participate.

The good news is that even if you have already graduated and are repaying your loans under a different program, you can switch to the IBR program.

To be eligible for the IBR program, a student must:

  • Have a relatively low income.
  • Have a relatively high loan balance.
  • Have Stafford, Consolidation, or Graduate PLUS loans made under the FFEL or Direct Loan programs.
The following loans are not eligible for the IBR program:
  • Loans in default.
  • Parent PLUS loans or loans that consolidated a Parent PLUS loan.
  • Private loans.

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The Income Based Student Loan Repayment Formula (IBR Formula)

The required payment under the Income Based Repayment Program is surprisingly easy to calculate. For those who just want an estimate without doing the math, visit the Department of Education's IBR Calculator.

To calculate the required payment under the Income Based Repayment Program:

  • Look up the poverty level guidelines for your family from the Department of Health and Human Services website.
  • Multiply the appropriate poverty guideline by 150%.
  • Subtract your adjusted gross income from the number you calculated in the previous step.
  • Multiply your answer by 15%.
  • Divide this answer by 12.
  • This is your new monthly payment, unless it is greater than your original payment under the 10-year standard repayment plan. If this is the case, your payment remains the same.

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Applying for the Income Based Repayment Program for Student Loans

Applying for the Income Based Repayment program is easy.

In most cases, you can find the necessary forms on your lender's website. If not available, you can call your student loan lender and they will mail you the forms.

Once you have the forms, you will need to mail back a minimal amount of documentation that includes the completed form and an income verification (bank statements, pay stubs, and/or a tax return).

Once these have been received by your lender, information on your new payment plan will be sent to you within 30-60 days.