EVERYTHING YOU NEED TO KNOW ABOUT INCOME BASED REPAYMENT

Figuring out how to navigate your student loan debt is like trying to figure out what to eat for lunch when you’re already hangry. (anger induced by hunger).

There are so many different options, that it leaves you (or at least, me) feeling like sticking my head under a rug and sobbing. (I get dramatic when I’m hungry). And to make matters worse, each student loan option is needlessly complicated. Its like trying to order a basic meal (a #1– a plain hamburger with fries and a Diet Coke) and then having your waiter assault you with sundry of questions. Well do you want special sauce with that? Do you want onions? What about grilled onions? Lettuce? Tomato? What about trying something crazy on it, like pineapple? Jalapeno? And before you know it, you’ve collapsed on the ground, too hungry to make any decisions. In each of the federal student loan forgiveness options, you have to follow the rules with precision in order to have your loans forgiven. So, first, you have to know what those rules are before you can make a decision. But the rules can be hard to understand. And your hungry. And understanding things when your hungry is hard. So, in our student loans simplified series, we are breaking down each of the federal student loan repayment options in bite sized pieces to help you understand and make the best decision for you.

Who’s hungry?

income based repayment simplified

This is the fourth post in our “Student Loans Simplified” series.

Income Based Repayment (IBR) is one of the  student loan forgiveness programs for federal student loans. It’s often used as a catch-all term for all of the student loan forgiveness plans, rendering it even more confusing than it already is. What people usually mean when they refer to an “income based repayment” is usually an “income driven repayment,” meaning any of the income driven repayment plans like IBR, PAYE, REPAYE, ICR. The idea behind IBR is that you pay a percentage of your discretionary income every month for 20-25 years and then whatever balance remains of your student loans is forgiven the 20th or 25th year. The catch? You are taxed on whatever balance is forgiven as if you earned that amount as income the year your loans are forgiven.

Let’s break it down.

Here is everything you need to know about IBR.

You can qualify for IBR if you have Direct (subsidized or unsubsidized), Graduate Plus, FFEL Consolidation loans, or Federal Direct Consolidation student loans.

In other words, Parent PLUS loans or consolidated loans that include Parent PLUS loans do NOT qualify for IBR. It is very important that you are aware what kind of loans you have. It would be awful to think that you qualify for student loan forgiveness, make the payments for 20-25 years, and end up not having your balance forgiven in the end.

You will pay 10-15% of your discretionary income for 20-25 years.

  • Discretionary income is calculated by your Adjusted Gross Income (you can calculate your AGI here) minus 150% of the state poverty guideline and family size.
  • You will pay 10% of your income for 20 years if you don’t have any student loans that were issued before July 1, 2014.
  • You will pay 15% of your income for 25 years if your student loans were issued any time before July 1, 2014.
  • If you are married, your spouse’s income and federal student loan debt will be considered in the calculation for what your monthly payment will be.

You have to recertify for IBR each year.

Once you sign up for IBR, you will have to recertify your income each year that you remain on the program. You will fill out paperwork verifying your income and employment. As long as you can continue to demonstrate “partial financial hardship” for the 20-25 years you are on the program, you will only pay 10% of your discretionary income.

You don’t have to stick with IBR even if you’ve already signed up for it.

Some people  will sign up for IBR for the first few years they are out of school and not earning as much as they will later down the road (i.e. a doctor who is in residency). If you qualify for PAYE or REPAYE, it is better (less expensive) to use one of those programs over IBR. This is actually our student loan repayment plan. We’re paying everything we can on REPAYE (and enjoying the short term interest subsidy) and then we are refinancing our student loans for a cheaper interest rate (we are in the process of this at the moment!). This approach literally saves us THOUSANDS of dollars as opposed to just sticking to REPAYE and then getting hit with a big tax bill the year that our loans would have been forgiven.

You will need to consider the tax implications of signing up for IBR.

Does your spouse earn a low income compared to his or her student loan debt? If yes, you should consider filing your taxes jointly so that you both qualify for IBR. Does your spouse earn a relatively high income, and not have any student loan debt? If yes, consider filing taxes separately so his or her income is NOT included in the calculation of your monthly payment on IBR.

If your income increases significantly, you will owe the amount you would owe under a standard repayment plan.

In other words, you will never owe more under IBR than you would under a standard repayment plan. Note that this could end up being a very expensive option, as the principal balance of your loan will have ballooned depending on how many years you have been in repayment. If this happens, it would have been better to just sign up for a standard repayment plan to begin with (if and only if you can afford it). If this does happen to you, its a good idea to refinance your student loans privately so that you can get a better interest rate, which will help save you some money.

Some tips:

  • if you qualify for PAYE, PAYE is better than IBR. (Costs less, your loans are likely going to be forgiven earlier
  • REPAYE is most likely better than IBR. But you can calculate what is least expensive using this FREE student loan debt calculator.

And there you have it. Understanding your student loan options does not have to be complicated. Read our other posts in the student loans simplified series to help you better understand your options:

Are you signed up for IBR? Do you plan to stick it out or ultimately refinance? We’d love to hear from you! 

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