Income-Based Repayment (IBR) is a federal student loan repayment plan for borrowers that are struggling to afford payments. The program helps to lower monthly student loan bills for borrowers and is one of four income-driven repayment plans, including Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE) and Income-Contingent Repayment (ICR). Read for more about Income-Based Repayment below and how it compares to the other income-driven repayment plans.
What is Income-Based Repayment?
Income-based student loan repayment, commonly referred to as IBR, is a type of income-driven repayment plan that caps your monthly student loan payments at either 10% or 15% of your discretionary income. Your student loan bill will never be more than you would have paid under the 10-year Standard Repayment Plan. Payments are recalculated each year based on your updated income and family size.
If you're married, your spouse's income will also be considered to determine your payment if you file a joint tax return. After 20 or 25 years of repayment, depending on when you received your first loans, your IBR student loan outstanding balance will qualify for student loan forgiveness. It's important to note that you may have to pay income tax on any amount that is forgiven. To see if this payment plan works best for you, you should use the repayment estimator on the Federal Student Aid website.
What Other Income-Driven Repayment Options Are There?
Many people confuse the phrase “Income-Based Repayment” with income-driven repayment plans, also known as IDR plans. IBR is only one type of income-driven repayment plan, meaning that you have other student loan repayment options based on your income to choose from. Income-driven repayment plans are generally used by borrowers to make their student loan payments more manageable. Borrowers will qualify for loan forgiveness after 20 to 25 years. Below, we've laid out the different repayment plans available to you.
|Income-Driven Repayment Plan||Eligible Loans||Years to Repay||Monthly Payment|
|Income-Based Repayment (IBR)||Direct and FFEL Loans (not including PLUS loans made to parents)||20 or 25 years||10% or 15% of discretionary income*. Any balance after 20 or 25 years will be forgiven.|
|Revised Pay As You Earn (REPAYE)||Direct Loans (not including PLUS Loans made to parents)||20 or 25 years||10% of discretionary income*. Any balance after 20 or 25 years will be forgiven.|
|Pay As You Earn (PAYE)||Direct Loans (not including PLUS Loans made to parents)||20 years||10% of discretionary income*. Any balance after 20 years will be forgiven.|
|Income-Contingent Repayment (ICR)||All direct loans||25 years||The lesser of 20% of income or what you'd pay on a 12-year fixed payment plan*. Any balance after 25 years will be forgiven.|
*Monthly payments will be updated based on changes in your income and family size.
Income-Based Repayment (IBR)
IBR is best for new federal student loan borrowers on or after July 1, 2014, that currently have monthly payments that are more than 10% of their discretionary income. If you borrowed before that date, your payments will be 15% of your discretionary income. If you're married, your spouse's income or loan debt is considered if you file a joint tax return. For both types of borrowers, your student loan bill must be less than the amount it would be under the 10-year Standard Repayment Plan to qualify.
IBR is the only income-driven repayment plan available for borrowers with FFEL Program loans. After 20 or 25 years of student loan repayment, depending on when you received your loans, borrowers are eligible for loan forgiveness for their outstanding loan balance. Keep in mind that your forgiven loan balance is taxed as income. Also, another thing to note is that IBR is the only income-driven repayment plan available for borrowers with FFEL Program loans.
Revised Pay As You Earn (REPAYE)
REPAYE, also referred to as Obama Student Loan Forgiveness, is the newest income-driven repayment plan available. This payment option is also best for federal loan borrowers that currently have monthly payments above 10% of their discretionary income. If you're married, both you and your spouse's income or loan debt is considered. But unlike IBR, there is no cap on monthly payments.
After 20 years of payments for loans taken out for undergraduate studies and 25 years for loans taken out for graduate studies, borrowers with outstanding loan balances will qualify for student loan forgiveness. REPAYE also has a student loan subsidy available for borrowers with monthly payments that don't cover interest charges. For subsidized loans, all of unpaid interest is covered and for unsubsidized loans, half of unpaid interest is subsidized.
Pay As You Earn (PAYE)
PAYE is best for federal loan borrowers with monthly student loan bills that are more than 10% of their discretionary income. Your monthly payments will never be more than you would have paid under 10-year Standard Repayment. If you're married, your spouse's income or loan debt will only be considered if you file a joint tax return.
To qualify, you must not have taken out a federal student loan before Oct. 1, 2007, and you received a disbursement of a Direct Loan on or after Oct. 1, 2011. Generally, you'll qualify for PAYE if your federal student loan debt is higher than your income or your payment is a significant portion of your income. Any outstanding student loan balance will be forgiven after 20 years of payment. You may have to pay income tax on your forgiven amount.
Income-Contingent Repayment (ICR)
ICR is best for Parent PLUS loan borrowers, as it is the only income-driven repayment plan available to you if you consolidate your loans into a Direct Consolidation Loan. Payments are the lesser of 20% of your discretionary income or what you would pay on a repayment plan with a fixed payment over 12 years, adjusted based on your income. If you're married, your spouse's income or loan debt will only be considered if you file a joint tax return or choose to repay your Direct Loans with your spouse.
Any outstanding student loan balance under ICR is forgiven after 25 years. You may have to pay income tax on your forgiven amount. If you've applied for other income-driven repayment plans but were rejected, this may be a good option for you to consider. However, you will usually pay more over time than under the 10-year Standard Repayment plan.
Should You Use an Income-Driven Repayment Plan?
IDR plans have a lot of benefits for student loan borrowers, especially for those who are looking to reduce their monthly payments. You will have to apply for these repayment plans either on studentloans.gov or by requesting a paper application from your loan servicer. However, there are some drawbacks to using these payment plans, as well. Below, we've listed some of the pros and cons of income-driven repayment plans that you should consider in combination with using IDR calculators to determine if these plans work best for your finances.
Pros of Income-Driven Repayment Plans
As we stated earlier, income-driven repayment plans have many benefits for those struggling to pay their bills. Each IDR plan has its own requirements, so you will have to search through to find which you can qualify for. Some of the major benefits of IDR student loans include:
- You'll have more manageable monthly payments: The main reason to use IDR plans is that they can lower your monthly payments. So, if your income is low compared to your student loan balance and takes a significant portion of your earnings each month, you should consider using an IDR plan.
- You can qualify for student loan forgiveness: IDR plans allow you to wipe away your student loan debt after 20 to 25 years, depending on when you borrowed from the government and which plan you choose. Keep in mind that your forgiven balance will be taxed as income.
- You can maximize the benefits of Public Service Loan Forgiveness (PSLF): These plans are good for borrowers seeking PSLF with FedLoan Servicing, as it can lower your payments each month. And you will qualify for loan forgiveness faster than you would just using an IDR plan, which is at minimum 10 years.
Cons of Income-Driven Repayment Plans
Unfortunately, these plans won't work for everyone. There are a few drawbacks to using IDR plans, depending on your financial situation and the type of loans you took out. In some cases, you may be better off refinancing your loans. Some of the major drawbacks include:
- You may pay more interest over time: Although your payments will be smaller, if your current repayment term is less than 20 or 25 years, you may end up spending more over the life of your loan. Since you are extending your repayment term, you'll accrue interest for an additional 10 to 15 years.
- You'll pay taxes on your forgiven balance: Unlike PSLF, outstanding student loan balances forgiven under IDR plans will be taxed as income. You can use the repayment estimator on Studentloans.gov to see what your tax bill would look like.
- Your loans will take longer to pay off your loan: If you are on the Standard Repayment plan, your loans will be scheduled to take 10 years to pay off (not including Consolidation Loans). Under IDR plans, you will be making loan payments for 20 to 25 years, depending on your plan.