What Is an Income-Based Repayment Plan for Student Loans?

A Guide to Income-Based Repayment (IBR)

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Student loan repayment can be difficult, especially if your income doesn’t quite meet the expectations you had when you picked your major. Thankfully for federal student loan holders, there are several income-driven repayment plan options.

One plan, income-based repayment (IBR), can benefit those who have a high debt amount relative to their income, and who need to limit their monthly payments to a portion of their discretionary income. Let’s take a look at the basics of this plan, and review who might qualify for the program.

What Is the Income-Based Repayment Plan?

With income-based repayment, you pay either 10% or 15% of your discretionary income. The idea is to make your student loans more affordable relative to your pay. Each year, your monthly payment is recalculated, based on your income and family size. 

At the end of either 20 or 25 years, depending on when you first received your loans, you can have any outstanding balance forgiven. If you were considered a new borrower on or after July 1, 2014, you can receive forgiveness after 20 years. Otherwise, your forgiveness comes after 25 years. 

Student loan debt forgiven or discharged between 2021 and 2025 is tax-free, due to the American Rescue Plan of 2021.

How the Income-Based Plan Works

When calculating your monthly payment under IBR, your family size and annual income will be considered. Then, your payment will be 10% of your discretionary income (if you are a new borrower on or after July 1, 2014), or 15% of your discretionary income.  Your payment will never be more than what you’d pay under the 10-year standard plan.

Each year, though, you have to resubmit information about your income and family size to renew your income-driven repayment plan. This is required even if there hasn’t been any change from the previous year.

With IBR, if your income increases or decreases, your payment amount is recalculated. 

If your income rises to the point where you’re now paying the standard 10-year repayment amount, based on 10% or 15% of your discretionary income, you no longer make payments strictly related to your income. However, you can remain on the plan, being required to pay no more than the original 10-year payment amount. You have the option to re-certify each year, so that if your income drops and the payments are no longer manageable, you can have your amount adjusted, again basing it on your income.

Who Can Qualify for IBR?

In order to qualify for IBR, you need to show that you have a low income relative to your federal student loan debt. You can use the Loan Simulator provided by the U.S. Department of Education to see what you qualify for and to estimate your monthly payment under the IBR plan.

As long as 10% or 15% of your discretionary income is less than the 10-year standard repayment amount figured for you, you can qualify. However, you must have federal loans. The types of federal loans that qualify for IBR include:

  • Direct Unsubsidized and Subsidized loans
  • Federal Stafford Loans (Subsidized and Unsubsidized)
  • PLUS loans made to students
  • Direct or Federal Family Education Loan (FFEL) Consolidation loans made to students

Parent PLUS loans aren’t eligible for income-based repayment.

Pros and Cons of the Income-Based Repayment Plan

Pros
  • Monthly payment is more manageable

  • Eligible for forgiveness if your balance isn’t paid at the end of a set period of time

  • Can still apply for Public Service Loan Forgiveness (PSLF), if eligible for that program

Cons
  • Likely to pay more over time than you would on the 10-year standard plan

  • Forgiveness amounts not tied to PSLF might be taxable as income after 2025

  • Parent PLUS loans not eligible

Other Income-Driven Repayment Options

There are other federal student loan repayment options available in addition to the IBR plan. These income-driven repayment plans include income-contingent and Pay As You Earn (and Revised Pay As You Earn) plans. 

Before choosing one of these plans, it’s a good idea to consider your own situation and needs. An income-driven plan can help ease your monthly cash flow, even though you could end up paying more in interest over time. 

Further, if you plan on qualifying for PSLF, an income-driven plan can be a good idea because if you stick with the standard 10-year repayment, you’ll likely have your loans paid off before you can have them forgiven.