Advertiser Disclosure
Last update: August 8, 2024
10 minutes read
Curious about how an Income-Based Repayment (IBR) plan can make your student loan payments more manageable? Explore the benefits and steps to qualify for lower monthly payments.
By Brian Flaherty, B.A. Economics
Edited by Rachel Lauren, B.A. in Business and Political Economy
Learn more about our editorial standards
By Brian Flaherty, B.A. Economics
Edited by Rachel Lauren, B.A. in Business and Political Economy
Learn more about our editorial standards
Struggling with student loan payments? An Income-Based Repayment (IBR) plan could be your solution. By capping your payments based on discretionary income, IBR helps make loan repayments more manageable. In this post, we'll break down how IBR works, who qualifies, and the benefits it offers, including potential loan forgiveness. Discover how IBR can ease your financial burden and keep your budget on track.
An Income-Based Repayment (IBR) plan caps your monthly student loan payments at a certain percentage of your discretionary income. This can make repaying your student loans more manageable if your income is lower relative to your debt.
The IBR plan is one of four Income-Driven Repayment (IDR) plans that the Department of Education offers for federal student loans. Currently, it is one of just two IDR plans open to new enrollees.
The IBR plan bases your monthly payment on your discretionary income. If you borrowed on or after July 1, 2014, your payments are capped at 10% of your discretionary income. For loans borrowed before this date, the cap is 15%.
Discretionary income under the IBR plan is calculated by taking your adjusted gross income (AGI) before taxes and subtracting 150% of the poverty guideline for your family size and state of residence. This means your monthly payments are tailored to your income and living circumstances.
Under other IDR plans, discretionary income can be calculated differently - so always make sure you double-check the fine print and know exactly how much you’ll be paying when you sign up for a repayment plan.
IBR is a type of income-driven repayment plan (IDR). IDR is an umbrella term that covers all of the different plans that take into account income when determining payments.
To be eligible for any income-driven repayment (IDR) plan, including IBR, you need a federal student loan. Direct Loans and Direct PLUS Loans are immediately eligible for IDR plans, although Federal Family Education Loans (FFEL) might need to be consolidated into a direct loan first.
For example, the Pay As You Earn (PAYE) plan requires that you’ve borrowed your first federal loan after October 1, 2007, and that you’ve borrowed a Direct Loan or a Direct Consolidation Loan after October 1, 2011.
Always confirm the specifics of your loans through the U.S. Department of Education's Loan Simulator.
You can enroll in an income-driven repayment plan online via the U.S. Department of Education's website. If you have older loans, you might need to contact your loan servicer directly.
During the application process, you'll need to submit income verification documents. This data is critical for calculating your discretionary income and determining your payment amount.
After your initial enrollment, you’ll need to recertify your income and family size every year. Keep in mind that failing to provide this updated information promptly could result in higher monthly payments.
The Saving on a Valuable Education (SAVE) Plan, available since 2023, automatically enrolls those previously on the REPAYE plan. SAVE lowers payments for most borrowers by basing them on a smaller portion of your discretionary income (5%).
Plus, it introduces an interest benefit - if you make your full monthly payment but it's not enough to cover the accrued interest, the government steps in to cover it, preventing your balance from increasing.
Although the SAVE plan offers many benefits, it is currently being blocked by federal courts, as of July 19, 2024. Borrowers enrolled in the SAVE plan will have their payments paused while the Education Department continues their legal battles.
Whether or not you should enroll in the IBR or SAVE plan depends on your specific financial situation. Note that the SAVE plan doesn’t have a monthly payment cap, so it might not be suitable if you expect your income to rise in the future.
To help you choose the right plan, here’s a comparison of various IDR plans.
Repayment Plan | Payment % of Discretionary Income | Eligible Loans | Repayment Terms (Years) |
---|---|---|---|
Income-Based Repayment (IBR) | 10% (post July 1, 2014), 15% (pre July 1, 2014) | Most Direct and Direct PLUS loans, Most FFEL and FFEL PLUS loans | 20 (post July 1, 2014), 25 (pre July 1, 2014) |
Income-Contingent Repayment (ICR) | 20% | No new enrollments except those with a consolidation loan that repaid a parent PLUS loan | 25 |
Pay As You Earn (PAYE) | 10% | No new enrollments | 20 |
SAVE plan (Undergraduates) | 5% | Most Direct and Direct PLUS loans, Most FFEL plus loans if consolidated | 20 (balances under $12,000 are forgiven after 10 years of payments) |
This table reveals the key differences between IDR plans, helping you determine the best option for your situation.
The Public Service Loan Forgiveness (PSLF) program offers forgiveness for the remaining balance of Direct Loans after you make 120 qualifying monthly payments while working full-time for a qualifying employer. These employers typically include government organizations at any level, nonprofit organizations, and certain other types of not-for-profit organizations.
One crucial element is that payments made under an IDR plan count towards PSLF. So if you’re in public service, combining PSLF with an IDR plan could significantly maximize your benefits. For more about managing student loans, you can read our guide on strategies for managing student loan debt.
If you are unable to make your student loan payments, you should first contact your loan servicer. They can guide you through the options, like enrolling in an IDR plan, which tailors your monthly payments to your income and family size.
Another option might be temporary deferment or forbearance; however, interest will continue to accrue during these periods, potentially increasing the total loan cost.
Being proactive can prevent your loans from becoming delinquent or defaulting and affecting your credit score. Learn more about issues arising from student loan delinquency in our comprehensive overview: what happens to student loans when you die or if you declare bankruptcy.
By understanding how each IDR plan operates and determining if you qualify, you can make informed decisions about managing your student loan debt more effectively. You won’t just lower your payments; you’ll take a definitive step toward better financial health.
When considering an Income-Based Repayment (IBR) plan for managing your student loans, it's essential to be aware of the key practices that can maximize your benefits and pitfalls to avoid. Here are some critical dos and don'ts to guide you through the process.
Explain the concept of discretionary income and its role in determining IBR payments.
Highlight the importance of annual recertification for income and family size.
Compare IBR with other Income-Driven Repayment plans, like PAYE and SAVE.
Mention the potential for loan forgiveness after 20 or 25 years under the IBR plan.
Overlook the potential for interest to accrue if payments don't cover it.
Assume all loans are eligible without confirming specific requirements.
Forget to address the impact of filing taxes jointly if married.
Neglect the administrative work required for annual recertification.
Income-Based Repayment (IBR) plans offer a way to manage student loan payments by capping them based on your income. This plan can provide relief through lower monthly payments and potential loan forgiveness, but it also comes with some drawbacks like longer repayment periods and possible interest accumulation. Here's a breakdown of the pros and cons to help you decide if an IBR plan is right for you.
At TuitionHero, we help students and parents navigate student loans, including Income-Based Repayment (IBR) plans and refinancing options. Our tools and resources help you make informed financial decisions and manage your student loan debt.
To apply for an Income-Based Repayment (IBR) plan, you'll need to provide proof of income (like a tax return or pay stubs) and family size information. This verification helps your loan servicer calculate your discretionary income and appropriate monthly payment. For more guidance on student loans, check out our guide on understanding student loans.
Yes, you can make extra payments at any time without penalty. Making extra payments can help you pay off your loan faster and reduce the amount of interest you pay over time.
However, remember that this won't lower your required monthly payment. Need more tips? Try our guide on managing student loan debt.
IBR payments may not always cover the accrued interest, especially if the payments are very low. However, for the first three years, the government pays the remaining interest for subsidized loans. For strategies on handling interest, consider exploring how to use a student loan calculator to plan your finances.
Yes, you can switch from an IBR plan to another IDR plan, depending on your eligibility. For example, moving from IBR to the SAVE Plan can be beneficial based on changes in your income or family size. For details on refinancing, which can also be a tool to lower your payments, visit our student loan refinancing section.
If you're married and file jointly, your spouse's income and federal student loan debt will be considered in calculating your IBR payment. This could result in a higher payment compared to filing separately.
Understanding how an Income-Based Repayment (IBR) plan works can significantly reduce your monthly payments. By shifting to payments based on your income, you have a better chance of keeping your finances in check without sacrificing other life priorities.
As you navigate this journey, remember that resources are available to help guide you through the process, including TuitionHero. To explore more about student loan forgiveness, visit our comprehensive guide on student loan forgiveness programs. Take control of your student loans today and find the repayment plan that best suits your needs.
Brian Flaherty
Brian is a graduate of the University of Virginia where he earned a B.A. in Economics. After graduation, Brian spent four years working working at a wealth management firm advising high-net-worth investors and institutions. During his time there, he passed the rigorous Series 65 exam and rose to a high-level strategy position.
Rachel Lauren
Rachel Lauren is the co-founder and COO of Debbie, a tech startup that offers an app to help people pay off their credit card debt for good through rewards and behavioral psychology. She was previously a venture capital investor at BDMI, as well as an equity research analyst at Credit Suisse.
At TuitionHero, we're not just passionate about our work - we take immense pride in it. Our dedicated team of writers diligently follows strict editorial standards, ensuring that every piece of content we publish is accurate, current, and highly valuable. We don't just strive for quality; we aim for excellence.
While you're at it, here are some other college finance-related blog posts you might be interested in.
TuitionHero is 100% free to use. Here, you can instantly view and compare multiple top lenders side-by-side.
Don’t worry – checking your rates with TuitionHero never impacts your credit score!
We take your information's security seriously. We apply industry best practices to ensure your data is safe.