You borrowed money to pay for college, graduated, and are waiting for your career ship to come in. Meanwhile, your student loans are now due and payable, but your paycheck isn't as fat as you anticipated. The good news is that your student loans may be eligible for an income based repayment plan, or IBR. Here's what you need to know about IBR eligibility and how to apply.
Income Based Repayment Plan: Are You Eligible?
The income based repayment plan is available to borrowers of federal direct or FFEL student loans prior to July 1, 2014 and to new borrowers of direct student loans (those without student loans prior to July 1, 2014.) The Department of Education discontinued the FFEL program in 2010, so this type of loan was not available as of July 1, 2014.
Your eligibility for an IBR plan is based on your discretionary income. For the purposes of determining your eligibility for an IBR, the Education Department defines discretionary income as the difference between your gross income and 150 percent of the poverty guideline for your state or residence and family size.
The payment that you would make under the IBR must be less than the required payment under the standard 10-year repayment plan. The Education Department notes that if your student loan balance is equal to or a significant percentage of your income, you will likely be eligible for an IBR plan.
What Types of Student Loans are Eligible for an IBR Plan?
In general, student loans made or backed by the federal government are eligible for an IBR plan. Student loans made through private institutions as part of the FFEL program may be eligible unless they were PLUS loans borrowed by parents. The following types of loans are eligible for an IBR plan:
- Subsidized and unsubsidized direct loans
- Direct PLUS loans made to students enrolled in graduate or professional programs
- Direct consolidation loans that were not used to repay PLUS loans made to parents
- Subsidized and unsubsidized Stafford loans that were made under the FFEL program
- FFEL loans made to students enrolled in graduate and professional programs
- FFEL consolidation loans that were not used to repay PLUS loans to parents
- Federal Perkins loans are eligible for IBR after consolidation into a direct consolidation loan
PLUS loans made to parents and private student loans not backed by the Education Department are not eligible for an IBR plan. If you have questions about what types of student loans you have and their eligibility, please contact the company that services your student loans.
Payment Amounts and Financial Documentation
In general, for eligible loans made prior to July 1, 2014, your IBR payment amount will be 15 percent of your discretionary income. For loans made on or after July 1, 2014, your IBR payment amount will be 10 percent of your discretionary income. For example, if your discretionary income is $15,000 annually, 15 percent would be $2250 or $187.50 per month. 10 percent of $15,000 is $1500 or $125.00 monthly. These examples are for illustration only as individual discretionary income calculations vary.
The maximum repayment term for an income based repayment plan is 25 years, but you're required to verify your income each year. There are two ways to verify your income. You can supply your adjusted gross income from a federal tax return filed within the past two years or you can supply alternative verification of your income.
If you're using adjustable gross income from a tax return, access an electronic application for your IBR and use the IRS Data Retrieval Tool to transfer your adjusted gross income onto your IBR application. If you have taxable income, you can submit a paper application for an IBR plan along with a copy of your most recent pay stub. If you're unemployed or receive only nontaxable income, you can indicate this on your IBR application and do not have to submit additional documentation.
Things to Keep in Mind
Lowering your monthly payments with an IBR can help you make ends meet until you're established in your career, but an IBR does not reduce the amount you owe on student loans. Extending your payments from the standard repayment term of 10 years to a longer term will increase the interest you pay on your education loans. Contact the servicer of your education loans to learn more about repayment options and to help determine if an IBR plan is your best choice. If you have multiple student loans, consider refinancing or consolidating your student loans into one loan with one payment. Depending on interest rates, it may be possible to consolidate with a lower single payment than the total of multiple payments.
The Consumer Financial Protection Bureau reminds borrowers using the income based repayment plan to recertify their income on time each year or risk having payments reset to the higher standard payment amount.