The Department of Education offers many different loan repayment options to help make payments more manageable. If you are a low-income earner, one of the most popular repayment programs to apply for is Income Based Repayment.
Benefits of the Income Based Repayment Plan
Most importantly, your payment is based on your income. What you owe is not taken into account. The new monthly payment amount will not be higher than 10% of your discretionary income, if were a new borrower on or after July 1st, 2014. On the other hand, if you had loans prior to this date, then 15% of your discretionary income is used to calculate your payment.
Either way, this is the amount of income you earn over 150% of the federal poverty line for your family size. This payment will not be higher than what you were paying under the standard ten-year repayment plan. In many cases, borrowers in the Income Based Repayment Program actually pay a grand total of zero dollars if their discretionary income isn’t high enough to meet the minimum amount. This is a good option for those who are looking for work after graduation and cannot meet their monthly payments in the meantime while also paying for their basic necessities.
Qualifying Loan Types
Eligibility for Income Based Repayment depends on which loans you chose to take out for your education and the date they were taken out. The following Federal Student Loans from the Direct Loan and Federal Family Education Loan (FFEL) Programs qualify for application:
- Direct PLUS Loans (Graduate and Professional Students)
- Direct Consolidation Loans without PLUS Loans that were made directly to parents and not just as cosigners.
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- FFEL PLUS Loans (Graduate and Professional Students)
- FFEL Consolidation Loans without PLUS Loans that were made directly to parents and not just as cosigners.
If your loan type is not listed above, don’t worry. You may still be eligible for the IBR by consolidating your federal student loans into the Direct Loan program.
Forgiveness of Interest
If your new monthly payment isn’t large enough to pay the accruing interest on subsidized portion of your direct loan, there are options for you! The federal government will pay it for a period of up to three years in a row—but no more than that–once you begin your Income Based Repayment program.
End of Term Forgiveness
This is one of the greatest and most relieving benefits. For new borrowers that took their loans out after July 1st, 2014, they can have their loans completely forgiven after 20 years. For borrowers that took them out before that date, they need to wait an additional five years, but the basic idea is the same—total forgiveness after 20-25 years.
The lifetime of an Income Based Repayment Loan is considered to be no more than 25 years, so if over the lifetime of this loan, you make 300 qualified payments and the loan is still not completely paid off, any remaining amount will be legally discharged and wiped clean from your record.
Keep in mind that this forgiven and discharged amount is considered taxable and must be paid for the year it was forgiven.
Public Sector 120 Month Forgiveness Plan
If you are a public service employee and you make 120 on time, full monthly payments under an Income Based Repayment program while employed full time with a public service organization, you could have the remaining balance of your loan or loans forgiven and discharged. Ideally, you could save up to 15 years of payments with this plan.
Annual Recalculation of Payment
Keep in mind that although there is no minimum payment with an Income Based Repayment Loan, the amount is still recalculated each year. In addition to the criteria listed in the first benefit, your family size, and any changes to income, including your spouse’s income, will change the amount that you are required to pay.
If your income increases or decreases, you will have to pay either more or less. However, even if your income rises dramatically from one year to the next, you can change your repayment plan into a standard repayment at any time you choose. Please feel free to get in touch with us if this happens to you and you are interested in changing repayment plans due to an income increase.
Get Started Right Away
While the Income Based Repayment Program does not accept many qualified applicants, if you do qualify, it is extensively beneficial to those who are struggling financially and do not wish to have a black mark on their credit report for many years to come. This program is designed specifically to help individuals and families in financial need while ensuring that the Federal Student Loan Program stays healthy and available for future students.