There are pros and cons to every plan available under the Income-Driven Repayment (IDR) umbrella. Sorting out which plan is right for you requires research and careful attention to detail. Read on to learn more about Income-Based Repayment, or IBR, and why it might be the right option for paying off your federal student loans.
Why should you choose IBR?
IBR may be the best IDR plan for those who took out their loan(s) after July 2014 and have a steady income that isn’t expected to increase dramatically. Under IBR, your monthly payment may be 10–15% of your discretionary income (depending on when your loan originated) and will never exceed the amount you would pay on the Standard Repayment Plan. As such, it’s often chosen by borrowers who want to ensure a low payment until they can reach forgiveness.
Why the date of your loan matters
Unlike other IDR plans, IBR has a date qualifier that changes the terms of the repayment plan. This is often known as “old IBR” (for loans that originated before July 2014) and “new IBR” (for those that originated after). The two IBR plans have different monthly payments and forgiveness timelines, so it’s important to understand the distinction. Note that both old and new IBR borrowers are eligible plans for the Public Service Loan Forgiveness program.1
What is your monthly payment under Income-Based Repayment?
Monthly payments under IBR are calculated at either 10% or 15% of your discretionary income. Since your income, family size, and location can change over the life of the loan, so too can your discretionary income calculation. As such, IBR includes a built-in stipulation that the monthly payment can never exceed what you would pay under the Standard Repayment Plan.
How discretionary income is calculated
It’s important to note that your discretionary income is calculated differently under the different IDR plans. Under IBR, it is considered to be the difference between your annual income and 150% of the poverty guideline for your family size and state of residence. These poverty guidelines are maintained by the US Department of Health and Human Services at aspe.hhs.gov/poverty-guidelines.
In order to initially qualify for the plan, the calculated monthly payment under IBR must be less than what you would pay under the Standard Repayment Plan (which is a 10-year fixed period). Generally, you’ll meet this requirement if your student loan debt represents a significant portion of your annual income.
Types of eligible loans
Many federal loans are eligible for IBR. Note that if you have FFEL Program loans and wish to enroll in IDR, IBR is your only option unless you consolidate.
Eligible loan types include:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- Direct or FFEL PLUS Loans made to students
- Direct or FFEL Consolidation Loans that do not include PLUS loans made to parents
- Federal Perkins Loans ONLY if consolidated
Ineligible loan types include:
- Direct PLUS Loans made to parents
- Direct Consolidation Loans that repaid PLUS loans made to parents
- FFEL Plus Loans made to parents
- FFEL Consolidation Loans that repaid PLUS loans made to parents
One of the most important things to keep in mind about IBR — and any IDR plan —is the need to recertify your plan each year (whether or not anything that might impact your payment has changed). This must be done annually with your loan servicer to remain eligible for the payment plan and eventual forgiveness (either through IDR or PSLF).
To recertify, you will submit what seems like a new application for IBR. Within the application form, there will be an entry for the reason you’re submitting, where you should specify that you are documenting your income for the annual recertification.
If your family size, location, or income changes mid-year, you can also recertify before the annual date by submitting updated information and asking your servicer to recalculate your payment. This can benefit you by reducing your payment appropriately—if you have a baby, lose your job or take a pay cut, or make any change that impacts your discretionary income.
Outside of the annual recertification, this midyear reporting is not required—if any of these items change and you do not wish to recalculate your payment immediately, you can wait until the next annual recertification Just remember that even if nothing changes, you must recertify each year.
Failure to recertify
If you fail to recertify under IBR, there are consequences. Your payment will revert to the Standard Repayment Plan amount (which would likely be higher than you’re used to) plus any unpaid interest would be added to your principal balance, increasing the amount you would pay over time. Essentially, you would have a higher monthly payment and a higher loan balance, and you’d now be paying interest on interest. Your loan servicer would also revert your family size to one, possibly further increasing your payment, and you may lose eligibility to base payments on income in the future. Which is to say: set that calendar reminder and don’t forget to recertify!
How does being married impact IBR?
Each IDR plan considers a spouse’s income differently and your monthly payment may change depending on how you file your taxes. For IBR, both “old” and “new,” the process is the same:
How you file
If you and your spouse file separate returns (“married filing separately”), your servicer will only use your individual income to determine your eligibility and monthly payment amount under IBR. If you file jointly, your joint income will be used. This can increase your payment, especially if your spouse does not have any loans.
If you both have loans
If you and your spouse both have student loans and you file jointly, your loan servicer will use the combined income, but will adjust your payment amount proportionally based on each spouse’s share of the total student loan debt. If filing separately, only your loan debt will be used. It can be wise to consult a financial expert, as there may be other implications when filing separately or jointly.
Note that you may have to submit additional documentation or authorizations if you live in community property states or if your spouse does not enroll in an IDR plan. Your loan servicer will let you know what information they need.
Do your research
IDR plans exist to make managing and repaying student loan debt easier, but it may take some fine-print reading and research to ensure you’re choosing the right plan for you. Always consult the Federal Student Aid website for updates, and read up on our other guides in this series on Income Contingent Repayment (ICR), Pay As You Earn (PAYE), and Saving on A Valuable Education (SAVE), which is replacing Revised Pay As You Earn (REPAYE). Set up a consultation with our student loan specialists who can help you to choose the best IDR plan for your circumstances.