What is the Income-Based Repayment Plan (IBR)?
In 2019, the Income-Based Federal Student Loan Repayment Plan (“IBR”) is one of the best options of all the Federal Student Loan Repayment Plans currently on offer.
Of the four Income-Driven Student Loan Repayment Plans, including the Income-Based Repayment Plan (IBR), the Pay As You Earn Repayment Plan (PAYE), the Revised Pay As You Earn Repayment Plan (REPAYE), and the Income-Contingent Repayment Plan (ICR), the IBR Plan falls in about the middle of the pack in terms of it’s utility, as it’s not the cheapest plan, but it’s also not the most expensive either.
This Guide will explain everything you need to know about the Income-Based Repayment Plan, including who is eligible to use it, how it compares to the other IDR plans, how it calculates your monthly payments, and whether or not it’s the right plan for you.
After reading through this Guide, if you still have any comments about how it works then please feel free to post them in the Comments section at the bottom of the page.
But Before I Explain the Details of the IBR Plan…
First let me introduce you to the dirty little secret of the student loan industry: dealing with your loans is a difficult, frustrating and complicated experience ON PURPOSE!
Why? Because when you’re confused, the student loan servicing companies win. When you don’t know how to utilize Federal Loan Forgiveness or Discharge Benefits, or when you aren’t sure how to enroll in the cheapest Repayment Plan then you end up taking longer to pay off your loans and getting charged more money.
What’s the way to get around this purposeful frustration? After offering advice on dealing with student debt for nearly a decade, my suggestion is to pay an expert to review your case and come up with the best repayment strategy for you.
But there’s only one company who I trust to help my readers – the Student Loan Relief Helpline, because they’re the only company I’ve worked with who actually looks out for their clients and offers them true, helpful advice.
The Helpline is staffed by actual debt experts who can look at your situation, then advise you on what you should be doing to get rid of your loans as quickly and affordably as possible, whether that’s refinancing them, consolidating them, or pursuing some form of forgiveness or discharge.
To get your student debt under control, call the Student Loan Relief Helpline now at 1-888-906-3065.
How Do the Income-Driven Student Loan Repayment Plans Work?
Before we go through IBR in detail, let’s under how the IDR plans work. First, as I mentioned above, all four of the available IDR plans offer one huge advantage compared to the traditional Standard Repayment Plan; they set your monthly payments based on income.
That means that if you don’t make much money, you may be able to significantly reduce your monthly student loan bill, and this is especially true if you don’t make much money, but also have a big family!
Here are several things that all the IDR plans have in common:
- The IDR Plans all use your Income and Family Size to determine what your monthly payments should be
- The IDR Plans all offer complete loan forgiveness at some point, though the point at which it’s reached vaires, from 20-25 years (or just 10 years if you can qualify for PSLF!)
- The IDR Plans all require you to pay income taxes on whatever amount of money is forgiven at the end of the plan, which I’ll explain in detail below
- The IDR Plans all require that you submit annual paperwork to “Certify” your income and family size
- The IDR Plans all save money in the short-run, if your income is low enough, but also usually end up costing you more over the lifespan of your loans, because of interest accumulation
Now – with that out of the way – how does the Income-Based Repayment Plan work?
How Does the Income-Based Repayment Plan Work?
One of the most confusing parts of the process of understanding how the IBR Plan works is that there are two different forms of the plan, one for people who borrowed their loans between 2009 and July 1st, 2014, and another for people who borrowed their loans after 2014.
So let me first show you a quick overview of how these two plans compare to each other, as your opinion of the IBR Plan’s utility is going to be heavily impacted by when you borrowed your student loans.
|IBR Plan||Eligibility||Monthly Payment Calculation||Forgiveness Earned At|
|IBR (2009 - 2014)||Direct or FFEL Loan Borrowers with a Partial Financial Hardship||15% of Discretionary Income||25 Years (300 Monthly Payments)|
|IBR (Since 2014)||Direct or FFEL Loan Borrowers with a Partial Financial Hardship who got their 1st loan after July 1st, 2014||10% of Discretionary Income||20 Years (240 Monthly Payments)|
Now that we understand that there are two different plans with different options for borrowers, please understand that the rest of this post is going to refer specifically to the NEW IBR Plan, the one that sets monthly payments at 10% of discretionary income, and which offers Forgiveness at the 20 year mark.
So what is discretionary income? Typically, it means the money left over after you’ve paid for basic costs of living, like your rent, mortgage, food and utility bills, but for the Income-Driven Repayment Plans, discretionary income is calculated in a more specific way.
How Are IBR’s Monthly Payments Calculated?
The Income-Based Repayment Plan sets your monthly payments at 10% of discretionary income, and calculates your discretionary income by subtracting the Federal poverty guideline for your family size from your gross income (after taxes).
For 2019, the rates for 150% of the poverty guideline in the 48 contiguous States and Washington D.C. are set at:
|Family Size ("Household Size")||150% of the Poverty Guideline|
Using this information, you can find your discretionary income by looking at how much you made after taxes, then subtracting the 150% poverty guideline level listed in the table above for your family size.
Next, to calculate how much your monthly payments would be under the IBR plan’s 10% rule, all you have to do is multiple your discretionary income by .1 (which is 10%).
If you want to avoid having to do the math yourself, simply head on over to the Government’s official Student Loan Monthly Payment Calculator, and plug your values into it to find out what you’ll need to pay each month.
Next let’s find out if you’re even eligible to use the IBR plan, because not everybody is allowed to enroll in it.
Eligibility Requirements for the Income-Based Repayment Plan
There are two main requirements to qualify for access to the Income-Based Student Loan Repayment Plan:
- You must have an eligible Federal loan (again, this plan just like all the other IDR plans are ONLY available to people with Federal loans)
- You must have a partial financial hardship (I’ll explain what that means in just a minute)
As long as you have an eligible loan, and are facing a partial financial hardship, then you’ll be allowed to enroll in the IBR plan.
Let’s look at those two requirements in detail to find out if you make the cut.
What Loans are Eligible for IBR?
All Direct and FFEL Loans are eligible for IBR, so that makes things simple on determining whether or not your loans can use this repayment plan.
Here’s a list of the types of Federal loans that can utilize IBR:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS loans made to students
- Direct Consolidation Loans, but not Direct or FEEL PLUS loans issued to parents
Basically, only FFEL PLUS Loans issued to Parents aren’t eligible for IBR (but they ARE eligible for ICR! So if you have a Parent PLUS Loan, check out my Guide to the Income-Contingent Repayment Plan).
With that said, just because you have the right type of loan doesn’t mean you can use IRB, because you’ll also need to be facing something called a “Partial Financial Hardship”, so let’s look at what that means next.
What is a Partial Financial Hardship?
To qualify for using the IBR Repayment Plan, you’ll have to provide documentation that proves you’re facing a partial financial hardship, which means that the amount of money you would have to pay each year under the Standard Repayment Plan exceeds 10% of your discretionary income.
So, to figure out if you’re facing a partial financial hardship, you have to first calculate your discretionary income level (instructions for that are outlined above), then calculate the amount you’d be paying under the Standard Repayment Plan, and see if it’s over 10% of discretionary income.
Assuming that you do face a partial financial hardship, then you’ll be allowed to enroll in IBR. If you don’t qualify, then you’ll need to look at the Income-Contingent Repayment Plan, which is the only IDR plan that does NOT require a partial financial hardship (both PAYE and REPAYE require partial financial hardships as well).
It’s relatively easy to face a partial financial hardship if you owe a lot of money, have a large family size, or a small income, and if you’ve got two of three, or all three of these things, then you’re almost guaranteed to be eligible for IBR.
Once again, you can use the Government’s official Repayment Estimator take care of the math for you and find out whether or not you really do face a partial financial hardship.
How Does IBR Loan Forgiveness Work?
One of the best parts of the IBR plan is that it offers complete Federal loan forgiveness benefits once you’ve made 240 monthly payments under the rules of the plan – that’s 20 years worth of payments.
Payments have to be made on-time, in-full, and according to the plan’s payment schedule, meaning monthly, but as long as you satisfy those conditions, it doesn’t matter how much you still owe – after that 240th payment is sent, the rest of your debt will be forgiven.
Oh, and since you can technically qualify for a monthly payment of $0, assuming you have a large enough family and small enough income, you should know that it is possible to get the entirety of your student loans forgiven without ever paying a single cent.
One thing to keep in mind is that your 240 payments don’t have to be made consecutively – it is ok to miss a payment here or there, you’ll have to make those payments up, and they simply won’t count towards the 240 payment threshold.
But while loan forgiveness sounds amazing, there’s a pretty significant catch involved; whatever amount of money you get forgiven will need to be counted as taxable income for IRS purposes, so you’ll have to pay taxes on the amount of debt that’s discharged.
For details on how that process works, make sure to visit my Guide to Student Loan Forgiveness and Taxable Income.
Also – the only way around this is to get enrolled in a niche program like the Public Service Loan Forgiveness Program, the Non-Profit Loan Forgiveness Program, or the Government Employee Loan Forgiveness Program, which let you qualify for loan forgiveness at the 10 year mark (120 payments) and which don’t require you to pay taxes on the forgiven debt.
Advantages of the IBR Repayment Plan
There are some pretty big upsides to the IBR repayment plan, including:
- Setting monthly payments at a much lower rate than you’d be able to qualify for under one of the standard repayment plans
- Cheaper monthly payments than you could qualify for under the Income-Contingent Repayment Plan
- In fact, since the new IBR matches the rates of PAYE and REPAYE, it’s tied for the cheapest monthly payments you can possibly get
But before you contact your servicer and ask them to enroll you in IBR, let’s also look at the downsides of this plan.
Downsides of the IBR Repayment Plan
But it’s not all sunshine and lolipops with IBR, because there are some downsides to leveraging this repayment plan, including:
- IBR may not reduce your payments much, at all, compared to the standard repayment plan, especially if you make a lot of money and have a small family
- IBR does require that you are facing a partial financial hardship, so if you don’t have one, but you want to use an Income-Driven Plan, then you’ll have to use the ICR plan
- The IBR Plan is not available to people with a Parent PLUS Loan
- IBR will end up costing you more in the long run compared to one of the standard repayment plans, and probably will end up costing more than the ICR plan too, since interest should accumulated faster under IBR than ICR
Unfortunately, the IBR plan is far from a one size fits all plan, and you’ll need to review your particular financial situation to determine if this is the best repayment plan for you.
Should I Pick the Income-Based Plan?
I honestly think that the IBR plan is a good option for many people, especially those who can qualify for the new version of the plan (the one for people who borrowed money after July 1st, 2014).
Since this plan matches the main benefits of PAYE and REPAYE, it’s basically the cheapest way to approach your monthly payments, and it still lets you eliminate whatever is left of your loans at the 20 year mark, so there’s really no reason to choose PAYE or REPAYE over IBR.
There are a couple niche advantages to PAYE and REPAYE that I’ll cover below, but for the most part, there’s very little difference between the new version of IBR, PAYE and REPAYE.
With that said, if your loans are older than July 1st, 2014, then PAYE and REPAYE offer better benefits – lower monthly payments and a faster forgiveness period, so I’d suggest utilizing them instead of IBR if you have older student loans.
The Income-Based Repayment Plan (IBR) vs. The Income-Contingent Repayment Plan (ICR)
In most cases, IBR is a better option than ICR, for the reasons I outlined above, plus:
- Monthly payments are almost always going to be lower under IBR, since it sets payments at 10% of discretionary income, whereas ICR sets the at 20%
- IBR payments are set based on only income and family size, whereas ICR payments also include how much you owe, which tends to make it a more expensive plan for people with higher debt loads
- You can use IBR if you have either Direct Loans or FFEL loans, whereas ICR is only available to people with Direct Loans
- Under IBR, the Government covers unpaid interest on subsidized loans for up to three consecutive years, allowing you to avoid interest capitalization for quite a while, whereas under under ICR, anytime that you pay less than interest, it’s capitalized, increasing your total debt
- On the IBR plan, unpaid interest is only capitalized after you no manage to get yourself out of “partial financial hardship”, or if switch repayment plans to one of the others, but ICR interest gets capitalized every single year, so it racks up much faster than IBR
For the vast majority of borrowers, IBR is superior to ICR. Basically, only people with Parent PLUS Loans will want to use ICR.
The Income-Based Repayment Plan (IBR) vs. the Pay As You Earn Repayment Plan (PAYE)
Most of the time, PAYE is a better option than the IBR plan, even though the main components of the plans are identical. Let me explain how these plans compare to each other:
- IBR and PAYE both set monthly payments at 10% of discretionary income (unless your loans are from before July 1st, 2014, and in that case, IBR would set your payment at 15%, so you’d want to use PAYE/REPAYE if possible)
- Both IBR and PAYE require facing a partial financial hardship, so that’s a wash as it’s an identical requirement
- PAYE requires you to be a “New Borrower”, which means that you took your loans out at a specific time, so many people won’t be able to use PAYE at all (however, they WILL be eligible for REPAYE, which is basically the same plan…)
- PAYE offers a slightly better interest benefit, in that both of these plans will cover your interest accumulation on subsidized loans for up to 3 years from the time you enroll in the plan, BUT… under PAYE, when you no longer qualify because you lose your partial financial hardship, your interest capitalization will be limited to 10% of the loan balance you had when you started on PAYE, whereas on IBR, there’s no cap on the amount of interest that will be capitalized
- IBR is slightly less stringent about requiring you to consolidate loans, because PAYE won’t cover Stafford Loans, FFEL Plus Loans to Grad or Professional Students, whereas these loans are eligible for IBR
My advice is to use PAYE if you can, because it’s typically going to be a better option than IBR.
And even if you can’t use PAYE, then I’d look into signing up for REPAYE instead, which is also a better option than IBR since it’s virtually identical to PAYE.
The Income-Based Repayment Plan (IBR) vs. the Revised Pay As You Earn Repayment Plan (REPAYE)
Since PAYE and REPAYE are almost identical, I’d say refer to the section above, but also keep a couple things in mind:
- REPAYE does NOT require you to be facing a partial financial hardship, so it’s basically an easier version of PAYE to qualify for
- Basically everything else is identical to PAYE though, so you can use the comparisons listed above to determine if IBR or REPAYE is best for you
Again, for most borrowers, REPAYE is a better option than IBR, so I’d try to get on REPAYE first, then only use IBR if you’ve got some issues with qualifying for it.
How Do I Switch Repayment Plans?
Now that we’ve got all of the technical mumbo jumbo out of the way… this is the easy part.
To switch student loan repayment plans, all you have to do is contact your loan servicer and let them know that you want to enroll in one of the other plans.
Each servicer is going to have a slightly different process for actually moving you from one plan to another, so you may have to fill out some paperwork or push some digital buttons to make it all happen, but the process is really easy compared to figuring out which plan will actually work best for you.
Other Student Loan Topics
Student loan repayment plans aren’t the only part of the process that you should be researching – there are all sorts of other important things you’ll want to fully understand before determining how to attack your student debt.
I created this website to provide people with an explanation of How to Get Rid of Student Loans Without Paying for Them, and over the past decade I’ve created over 100 Guides to dealing with different parts of the student loan repayment process.
If you’re struggling with your loans, and trying to figure out what you need to do, then you should take a look at some of the other Guides listed on this site.
To get Help with Federal Student Loans, take a look at my Guides on:
- Federal Student Loan Forgiveness Benefits
- Federal Student Loan Bankruptcies
- Federal Student Loan Consolidations
- Help with Federal Student Loan Delinquency & Default
- The Federal Student Loan Rehabilitation Program
- Dealing with Federal Student Loan Wage Garnishments
- Federal Student Loan Deferment Programs
- Federal Student Loan Forbearance Programs
- Federal Student Loan Repayment Plans
And for Help with Private Student Loans, you’ll want to visit my Guides on:
- Private Student Loan Forgiveness Benefits
- Private Student Loan Consolidations
- Private Student Loan Bankruptcies
- Help with Private Student Loan Defaults
Alternatively, if you’ve got any questions about anything related to student debt, please do feel free to post them in the Comments section below and I’ll do my best to get you a response within 24 hours.
NOTE: Please do not attempt to contact me via email or Facebook, as I will ONLY respond to Comments posted here on FSLD.
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Disclaimer:Information obtained from Forget Student Loan Debt is for educational purposes only. You should consult a licensed financial professional before making any financial decisions. This site receives some compensation through affiliate relationships. This site is not endorsed or affiliated with the U.S. Department of Education.