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Income-Based Repayment Plans: 10 Questions to Guide Your Research

Student loans are a sad reality for many college graduates. For those who go on to enter the workforce, starting salaries might be insufficient to pay back student loans within a reasonable timeframe.

There are many federal programs to help manage your student loans (including PAYE, REPAYE, Income-Based Repayment (IBR) plans, and Income Contingent Repayment (ICR) plans). This article will walk you through the nuts and bolts of IBR. And to get you started, we’re providing a list of questions you might consider as you begin your research or consult an advisor about whether IBR is right for you.

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  1. What is IBR? IBR is an acronym that is often thrown around as a catch-all for any income-based student loan repayment plan. However, it is a separate and unique federal student loan repayment plan that puts upper limitations on your monthly loan payment, according to your income and family size. In addition to helping you manage your loan repayment amount, any remaining loan balance is forgiven after 20 or 25 years of qualified participation in the program.

  2. Who can qualify for IBR? IBR is available to anyone with direct subsidized or unsubsidized loans, direct consolidation or Federal Family Education Loans (FFEL), consolidation loans, and PLUS loans made to students. Any PLUS loans or other loans made directly to parents are ineligible, as are consolidated loans repaid by parents and all private loans.

  3. Do you understand the Federal Poverty Level? The IBR plan limits your total repayment to no more than 15% of whatever you earn above 150% of the Federal Poverty Level. If you earn less than the 150% threshold, your repayment is $0. The Federal Poverty Level is a bit of a moving benchmark. It typically changes each year based on inflation and can vary from state to state. Check your state to ensure you calculate the 150% threshold correctly.

  4. Do you understand discretionary income? The amount of income you have above the 150% threshold is considered to be discretionary income. How discretionary is defined becomes very important. It’s the difference between your adjusted gross income for the year and 150% of the Federal Poverty Level for your state, based on family size. Most people who qualify for IBR will pay either 10% or 15% of this discretionary figure towards their student loans.

  5. When did you borrow? Generally, limits on discretionary income change according to whether or not you’re a new borrower. You are considered a new borrower if you made a loan after July 1, 2014. The deal gets a little bit sweeter if you’re a new borrower, as new borrowers have a 20-year repayment period before loan forgiveness. Non-new borrowers have a repayment period of 25 years.

  6. Will there be any tax implications? Crucially, any amount of forgiveness under an IBR plan is not tax-deductible, but instead will be considered taxable income.1 You’ll want to explore your situation with a tax professional who is qualified to advise you on tax issues to make sure it’s the right choice for you.

  7. What will your payments be? This is different for everyone, and your IBR amount will likely change from year to year. Because IBR is dependent on family size and income level, any changes to your family structure (marriage, new baby, divorce) and income (bonus, annual raise, part-time work) will alter your repayment amount. Your loan servicer will send you a notice every year when it’s time to recertify for IBR. You must submit another income-driven repayment plan application each and every year to qualify and recertify.

  8. How often will you have to file paperwork? It is extremely important that you recertify family size and income every year, by the annual deadline. Failing to do so has dire penalties. In the worst-case scenario, you could lose your eligibility to make payments based on income. So if you pursue this route, you’ll want to stay on top of annual deadlines and requirements.

  9. How do you apply? Consider very carefully if this program is the right fit for you. If you think it is, you can submit an application (an Income Driven Repayment Plan request) at StudentLoans.gov, or in paper form from your loan servicer. It may take several weeks after applying for your request to be processed.

  10. What are the pros and cons of IBR? Here’s a short list you can use to drive your research or your conversation with a professional:

Pros

Cons

  • Manageable monthly payments
  • Ability to reduce payments during periods of financial adversity
  • Potential for loan forgiveness
  • Longer repayment period
  • Loan forgiveness isn’t free; included in taxable income
  • Potential to pay more in interest than standard 10-year plan
  • Lots of paperwork every year
  • Income may be too high to qualify

 

IBR is just one of several income-driven repayment plans. Do your homework, and consult with a professional who understands your personal situation before you make any final decision about repayment plans.


1 Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. ( OR “The credit union”) has contracted with CFS to make non-deposit investment products and services available to credit union members. CFS does not provide tax or legal advice. For such guidance, please consult a qualified tax and/or legal advisor.