Pros and Cons of Income-Based Student Loan Repayment Plans (IBR)

Income-based repayment (IBR) is one option among several income-based options to repay your student loans. While private student loans do not offer this specific plan, federal student loans are eligible for this change.

As one of several income-driven repayment options for federal student loans, income-based repayment sets your monthly student loan repayment amount to a range you can afford. This is based on how much money you make and your family size, including dependents.

Like other types of income-driven repayment, IBR looks appealing because each monthly payment is lower than the standard repayment plan; however, you end up paying more through accrued interest than you would if you accepted the standard 10-year repayment plan.

What Is Income-Based Repayment and Who Qualifies?

For graduates whose federal student loan debt is higher than the amount of money they make every year, income-based repayment plans for student loans help to ease their financial burden.

The Department of Education (DOE) sets income-based repayment plans for student loans at a small percentage of your discretionary income, depending on when you took out your student loans. 

• New borrowers on or after July 1, 2014, have monthly payments set at 10% of their discretionary income.
• Borrowers prior to July 1, 2014, have monthly payments set at 15% of their discretionary income.

Whether your payments are set at 10% or 15% of your income each month, the amount you pay will never exceed what you would pay every month on the standard repayment plan. If this percentage of your income is more than what you would pay on your principal with interest each month on a standard, 10-year repayment plan, you should remain on this plan instead.

Federal loans that are eligible for income-based repayment include: 

• Direct subsidized loans
• Direct unsubsidized loans
• Subsidized Federal Family Education Loans (FFEL)
• Unsubsidized FFEL loans
• FFEL PLUS loans for graduate and professional students
• Direct PLUS loans to graduate and professional students
• Direct consolidation loans that do not include parent PLUS loans
• FFEL consolidation loans that do not include loans to parents
• Federal Perkins loans that have been consolidated under the direct loans program

Federal student loans are eligible for IBR, except for parent PLUS loans. Parents who take out federal loans to help their children pay for their education do have an income-driven repayment option, but it is not IBR.

When you submit the IBR plan request, you will need to submit information proving that you are eligible. This includes calculating your adjusted gross income (AGI) through: 

• Federal income tax information for the past two years
• Other documentation showing your monthly income, like one year of pay stubs

Applying online through the DOE website allows you to automatically transfer your federal income tax information using an online request. If you submit the form through the mail or on paper, you will need to get your own copy of your income taxes.

The Pros and Cons of Income-Based Repayment on Student Loans

Making less than you need to cover your living expenses, support your dependents, and pay your student loans is stressful. The federal government offers help to manage your monthly payments through several income-driven options, including IBR.

There are many benefits of the income-based repayment plan for student loans:

• You can pay less each month so you can focus on living expenses.
• You can work in a job you love or for the public good in a low-paying position.
• You could pay nothing as your monthly payment if your income is low enough or you are unemployed.
• If your payments are not enough to cover accrued interest, that interest is capitalized into your principal and could be forgiven.
• Periods of economic hardship deferment, repaying under other payment plans, and paying nothing in some months count toward your total repayment period of 20 or 25 years.
• Any amount remaining on your loan after the repayment period ends will automatically be forgiven.
• If you qualify for the Public Service Loan Forgiveness (PSLF) program, your loan will be forgiven after 10 years of IBR payments rather than 20 or 25 years.

For students who took out FFEL loans, your only income-driven repayment option is IBR for these student loans.

There are some downsides to switching to IBR:

• You pay your loan over 20 years if you are an older borrower or 25 years if you are a new borrower, so you spend more time repaying the money.
• You will pay more money on the loan over time because of accrued interest, including interest that is capitalized into your principal.
• You will need to reapply for IBR every year, so your loan servicer can assess your income and family size to ensure you qualify.
• The Internal Revenue Service (IRS) considers any forgiven loan money to be taxable income, so you will need to claim that after 20 or 25 years.

How to Set Up Income-Based Repayment for Your Student Loans

You must contact your loan servicer to change the repayment plan on your federal loans. Typically, you will not know until after graduation whether you will need this repayment plan or not. Exceptions include those who know they will go into public service, including teaching, law enforcement, military service, or the Peace Corps.

When you set up IBR for your student loans, your income and your family size will both be considered. You may make a comfortable middle-class income for one person, but if you have children and a spouse to support, you could qualify for IBR.

You must recertify every year for IBR, so your monthly payments for the year will change based on changes in your personal life. At some point, you may find that you make more money and can return to a standard repayment plan, or you can even pay off your student loans faster than 10 years.

Be sure to let your loan servicer know if you can change your IBR plan. If you do not recertify your income by the deadline, you will technically remain on IBR, but your monthly payments will return to the principal plus interest amount you would pay under the standard repayment plan.

Private student loans do not offer these repayment options; however, if you have both federal and private student loans, your private loan debt could count toward qualifying your federal loans for IBR.