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Income-Based Repayment for Student Loans

The Federal Student Aid site has put together a great page on their new Income-Based Repayment Plan. Income-Based Repayment (IBR), is just what it sounds like–a repayment plan for federal student loans that caps your minimum based on your income.

Which Loans are Eligible for Income-Based Repayment?

According to the site:

Any Stafford, Grad PLUS or Consolidation loan made under either the Direct Loan or FFEL program is eligible for repayment under IBR, EXCEPT loans that are currently in default, parent PLUS Loans, or consolidation loans that repaid a parent PLUS Loan.

How do I Enroll in Income-Based Repayment?

If you check out the IBR page and think you’re eligible (you can use the calculator to find out), contact the people holding your student loans directly. Let them know what you’ve found, the results the calculator gave you, and discuss your options.

What Does Income-Based Repayment Look Like?

The IBR page has a sample chart and a calculator which you can check out. Here are some sample numbers from the chart:

For a family of two with an AGI of $50,000, the max monthly payment would be $352. For a family of 1 making an AGI of $20,000, the max monthly payment would be $47. For a family of 4 making $35,000, it would be $24.

What Are the Advantages of Income-Based Repayment?

This biggest advantage of being in IBR is that you should get a monthly payment you can afford. For some people, this will make a huge difference, especially if they have a large student loan for a low-paying job. It’s not the same as a deferment, as you do have to pay the monthly amount you’re assigned.

However, as with some deferments, the government will cover the interest accruing if it is not covered by what you’re paying each month. This only lasts 3 years–after that, as long as you’re under the IBR the interest will be added to the total of your loan.

Other advantages of being in the IBR program are a) a 25-year cancellation–if you can’t pay it off in 25 years, your loan ends anyway and b) a 10-year public service loan forgiveness–details available in this PDF.

What Are the Disadvantages of Income-Based Repayment?

There are two downsides to using IBR. One isn’t so bad–if you’re in the IBR program you have to prove your eligibility every year. Small price to pay for paying less.

The second is that IBR lengthens the period you’re paying your loan (after your IBR eligibility ends) because you’ve paid off less of the principal while you were making reduced payments. Therefore you also pay more in interest, even if all your interest was covered by the government while you were in the IBR plan.

Even though it lengthens the time and the amount you pay, this plan may be a lifesaver. When asking your loan holder about it, ask about the possibilities of paying more each month and having it applied to the loan’s principal. If that’s not an option, try putting aside your budget snowflakes and extra money you can put toward loans in a special savings account and make one mass payment toward principal once you’re out of the program.

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vicki July 3, 2009 at 5:31 pm

There is one other disadvantage (not mentioned on the Department of Education site) in this monthly payment formula: When the loan is forgiven (with all the added interest that has accrued) you have to pay income taxes on that amount, for the year it is forgiven. In other words your income for that year will be your normal agi plus the amount that was forgiven. How would you like to pay taxes on an income of $100,000, when you only earned $35,000?

vicki’s last blog post: Monthly Payment Formula for Student Loan Repayment Program

Stephanie PTY July 8, 2009 at 3:52 pm

I’ve been taking a close look at IBR, but I’ve decided it’s probably not for me. Although there’s a good chance I won’t make a lot of money during my lifetime (in which case, it would benefit me a lot!), there’s a downside: there’s also a chance I will marry someone who makes quite a bit more than I do. IBR is based on family income, which means my payments would actually shoot up if I got married to someone pulling in good money.

And if I marry the guy I’m currently dating? He’s said “you’re on the hook for your own student loans, no matter what.” So, I have to pay them by myself, but my payments would shoot up due to being married to him. Argh, no thanks! I’ll stick with the payment plan I have now.

Stephanie PTY’s last blog post: Erasing Negative Credit History: 5 Strategies You May Not Have Heard About

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