After College: Can and Should You Use Income-Based Repayment?

Did you read last Wednesday’s article about Federal Direct Loan Program’s (FDLP’s) conventional repayment plans? Hopefully, you even checked out those plans. If they don’t meet your needs, you’ve got other options called “income-driven repayment plans.”

These plans work well if your federal college loan payments are high compared to your income. They can even set $0 monthly payments if your income’s low enough. But they also drag out repayment, so it’ll take longer and cost more to eliminate your federal college debt.

The income-driven plans offer you up to 20-25 year repayment periods. And they forgive whatever you might owe when such repayment periods end. They can also help you qualify for Public Service Loan Loan Forgiveness (PSLF) in 10 years.

They’re called “income-driven” plans because you reapply for them every 12 months, when they reset your monthly payment amount based on your documented Adjusted Gross Income (AGI).

Unfortunately, these plans use overly-complicated criteria and formulas to determine eligibility and monthly payment amounts. They’re so byzantine that we can’t fully describe all of them today. So today we’ll examine the most popular of these plans — Income-Based Repayment (IBR).

Under IBR, your monthly payment amount will never exceed one-twelfth of:

  • 10% of the difference between 150% of the federal poverty line for your family size and your AGI if you’re a new borrower with a partial financial hardship; or
  • 15% of this difference if you’re not a new borrower but have a partial financial hardship.

You can use IBR to repay your FDLP Subsidized, Unsubsidized, and Graduate PLUS Loans. You can also use it to repay your FDLP Consolidation Loans that repaid federal loans made to you as a student. But IBR cannot be used to repay FDLP Parent PLUS Loans, or FDLP Consolidation Loans that repaid Parent PLUS Loans.

Using the Federal Student Loan Repayment Estimator is the easiest way to see if you’re IBR eligible and what your IBR payments would be. The Estimator employs the following definitions to make these determinations:

  • AGI: Your AGI equals what’s listed on your most recent federal tax return, plus your spouse’s most recent AGI if you’re married and the two of you filed a joint tax return;
  • New Borrower: You’re a new borrower if you had no outstanding FDLP or Federal Family Education Loan Program (FFELP) debt on July 1, 2014; and
  • Partial Financial Hardship: If you’re a new borrower, you have this hardship if what you’d repay over 12 months under the FDLP’s 10-year Standard Repayment Plan — either when you began repayment or when you select IBR, whichever amount is greater — would exceed 10% of all you borrowed from the FDLP or FFELP. If you’re not a “new borrower,” you’ve got a partial financial hardship if this percentage exceeds 15%.

So use the Federal Student Loan Repayment Estimator to see if you’re eligible for IBR and if IBR meets your needs. More about other income-driven repayment plans October 30.

College Affordability Solutions offers 41 years experience in administering student loans and their repayment. Contact us for free consultations at (512) 417-7660 or if you need help in managing and paying off your student loan debt.

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