The Income-Based Repayment Plan for Student Loans
The Income-Based Repayment plan is a new payment option for student loan borrowers, intended to help those who have a high debt level compared to their income. It was created to help people who have a hard time making their student loan payments in a typical 10-year repayment plan. If you have federal student loans, such as Stafford or Graduate PLUS loans, you may be able to reduce your monthly payments. You may even be able to eliminate your student loan payments altogether, depending on your income and the size of your family.
Who qualifies for Income-Based Repayment?
Most students and former students with federal student loans from either the Direct Student Loan Program or the Guaranteed (FFEL) Student Loan Program are eligible. Your debt-to-income ratio must also be at a certain level to qualify – meaning, you must have enough student loan debt relative to your income. There’s a calculator available at http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRCalc.jsp
that can help you figure this part out.
What types of student loans are included in an Income-Based Repayment plan?
Most federal student loans are included, such as:
- Federal student loans through either the Direct Student Loan Program or the Guaranteed Student Loan Program (FFELP)
- Stafford Student Loans
- Graduate PLUS Student Loans
- Federal consolidation loans that do not include Parent PLUS Loans
- Perkins loans, if they have been consolidated into a federal student consolidation loan
Student loans that are NOT included are:
- Parent PLUS loans, or federal student consolidation loans that include Parent PLUS loans
- Private student loans, state student loans, or any other kind of loan that is not guaranteed by the federal government
How does the Income-Based Repayment change the student loan payments?
The Income-Based Repayment uses a sliding scale to figure out how much you can afford to pay each month on your federal student loans. For example, if you earn below 150% of the federal poverty level income for your family size, your student loan payment would be $0. If you earn more than that, your student loan payment would be capped at 15% of whatever you earn above that amount.
Except for the highest levels of income, the payment usually winds up being less than 10% of your total income. This helps to keep your student loan payments manageable.
Do borrowers still have to pay interest on student loans with the Income-Based Repayment?
The answer depends on your situation. In some cases, your new, reduced student loan payment may not cover the interest that has accrued on your student loans. If that’s the case, the government will pay that interest on your Subsidized Stafford Loans for the first three years you take part in the Income-Based Repayment plan. After three years, and for all other loan types that are part of the plan, the interest will be added to the total amount you owe, just like any other type of loan repayment.
This means that your debt may grow if your reduced payments are low enough. However, any interest you still owe after 25 years of making qualifying payments will be forgiven.
What are qualifying payments?
Qualifying payments count toward the Income-Based Repayment 25-year forgiveness period. They include:
- Student loan payments made in the Income Contingent Repayment plan before July 1, 2009
- Any student loan payment made on or after July 1, 2009, in the Income-Based Repayment Plan, the Income Contingent Repayment plan, or the Standard (10-year) Repayment plan.
- Periods of time during repayment when the borrower has a payment of $0 in the Income-Based Repayment Plan or the Income Contingent Repayment plan.
- Periods of time on or after July 1, 2009, when the student loan borrower has been granted an economic hardship deferment.
What are the disadvantages of participating in the Income-Based Repayment?
You may wind up paying more interest over the life of your student loans, because the repayment period has been extended from 10 years to 25 years (meaning there is more time for the interest to accrue). You also have to submit documentation every year to your lender about your income and family size.
How do I get started?
Contact your student loan lender for more information or to apply for Income-Based Repayment.
