Your Guide to Income Based Repayment

Over the past few weeks I’ve hinted at the fact that I am unofficially a college graduate. The ceremony isn’t till next month, then I will be an official graduate. So today I wanted to discuss something that goes hand in hand with college, student loans.

Student loans are a double edge sword and not something to be taken lightly but the topic for today is for all those people that have already gone through school and are now taking on the burden of paying back those loans.

According to the US government, the answer to that burden is the Income Based Repayment plan.

What is Income Based Repayment?

Income Based Repayment, or IBR for short, is exactly what it sounds like, loan repayment based on your income and family size.

It’s kind of like a loan modification (minus the negative connotation associated with loan mods), because you actually keep your current lender and just apply for the program. If your application is approved, the government puts a cap on the amount of money you are required to pay towards your loans each month.

Who can qualify?

To qualify for IBR, you must have a “partial financial hardship”.  I’m not exactly sure why the Department of Education would word things like that, I mean who isn’t under partial financial hardships most of their life? But the qualifications, more specifically, are if you would pay less under IBR than you would under a Standard Repayment Plan with a 10 year repayment period, you qualify for IBR as long as your loans are federal loans. IBR is not an option with private loans.

Here is an example from the official FAQ:

“If you owed a total of $40,000 in eligible student loans when the loans initially entered repayment, your monthly repayment amount under a 10-year Standard Repayment Plan would be $460 (using an interest rate of 6.8%). If your IBR payment amount, is less than $460, you would be eligible to repay your loans under IBR.”

If it helps you out, you qualify. Pretty simple huh?

What’s the catch?

ok, there are a few things to consider when looking at Income Based Repayment as a means to reduce your financial hardship.

  1. Under IBR, interest continues to accrue.
  2. Your interest rate is kept the same and when you pay less to your loan, it will take longer to pay off, and your interest will continue to accrue. Thus, you will end up paying more on your loans than you would if you paid them off earlier.

  3. IBR monthly payment is not a fixed amount.
  4. Every year your IBR loan will be reviewed by your lender to see what next years monthly payment will be. You see, it’s based on your income and family size so if either of those change, your monthly payment under IBR will change as well.

    On the positive side, the monthly payment can increase or decrease. If you lose your job and no longer have an income, you won’t be required to pay anything till you have an income and your loan is reviewed again. If after 25 years, you are still paying your federal student loans under IBR, they are canceled and you are forgiven of that debt and the interest on the loans.

  5. You must submit documentation each year.
  6. This can be a pain but like stated above, your loan has to be reviewed yearly. In order for the lender to do that, you are required to submit documentation of your income each year.

Other Useful Info

IBR has no effect on your grace period after graduation, usually 6 months, until you enter repayment. It is suggested to go through the application process a few months before your grace period ends so that your application can be processed before you have to start repaying the loans.

Under IBR, if your monthly payment is low enough that not all of the interest on the loans is being paid, the government will pay the interest on the subsidized loans for you for the first 3 years of repayment.

Anyone with loans can enter into IBR, even if you graduated ten years ago.

My thoughts

In my opinion this is a great program. With the economy the way it is, you can’t just land your dream job right out of college. I know people with Masters degrees that are unemployed. Times are hard and this can help you balance things as you enter the workplace and start making your mark on the world.

Under IBR, you can pay more to your loans, just like any loan repayment program. If you enter IBR repayment and then land your dream job, start funneling more money than required into the loan, just like you should with regular repayment.

More Info

Just like any other financial decision, do your homework! This info I have provided is just an overview of the program. Here are some other places to get all the facts about the program before you consider it.

  • IBRInfo.org. This is a nonprofit site that provides tons of great info about the program including videos, FAQ and a calculator to see if you qualify for the program.
  • StudentAid.ed.gov is an official government site that you can read more facts and examples about the program. They also have a qualification calculator.
  • Official FAQ gives a ton of info as well as frequently asked questions about the program.

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22 People have left comments on this post



» Money FunkNo Gravatar said: { Apr 7, 2010 - 02:04:50 }

I just recently automated my payments. I love it! In fact I have automated almost all my bills. I do look over them 1x a month for any discrepencies, make sure the dates are set correctly, etc… Now that its on autopilot, it leaves me time to consider how I am going to build my wealth. :D

I think IBR is great for people just getting out of college or facing current financial difficulties, but are not at the need to defer their loans.

I am staying with my standard based payments. One I hope to increase in the near future. Cuz having SL debt stinks! But it was worth it at the time.
.-= Money Funk´s last blog ..How much did you earn to give up your dream? =-.

[Reply]

Jesse MichelsenNo Gravatar Reply:

Thanks for the comment, Funk :)

I agree, just like anything else finance related, IBR is not for everyone, but it certainly can help some people out and get them back on track to financial stability. Think if other areas of finance would be so flexible, such as mortgages…there certainly would be less forclosures but then again the long term reprocussions may prove undesirable :)

I personally looked at IBR because I was worried about my loans (I just graduated so am in my grace period for now) but after reading all the docs over several times, I still haven’t decided what I will do.

[Reply]

» NinjaNo Gravatar said: { Apr 7, 2010 - 10:04:34 }

Any indication at what income you are considered to be making too much money to qualify?

[Reply]

Jesse MichelsenNo Gravatar Reply:

Ah, Ninja, I forgot to add that portion. Thanks for the reminder. Bascially, it is based on your income vs loan amount. There is a chart located here: http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jsp

Just check the chart, your income, and the payment listed. That payment is the IBR payment, so if your current payment is less than that, you won’t qualify.

[Reply]

» TechEntreNo Gravatar said: { Apr 18, 2010 - 01:04:33 }

I think its a good idea if it means you are obligated to pay less per month. You can still choose to pay more if you want to (and you should if you can).

[Reply]

Jesse MichelsenNo Gravatar Reply:

For sure, Tech. I have been teetering back and forth about actually applying for IBR on my loans, but I think I will go for it. I just got an estimated bill, and there’s no way I can pay the amount they want without IBR helping me out, though I will be payintg more than IBR suggests. Man, school is expensive..

[Reply]

» JerryNo Gravatar said: { Apr 19, 2010 - 11:04:38 }

Jesse- Great blog. As a parent of a graduating medical student, I see huge future Stafford debt service that can be lessened with IBR. Also, does anyone have details or websites for debt forgiveness after 10 years of both IBR and employment with a 501c non-profit? thanks, jerry

[Reply]

Jesse MichelsenNo Gravatar Reply:

Jerry, thank you. I couldn’t imagine the load medical debt could bring into a new household. The website I listed in this post, IBRInfo.org, actually has information about the 10 year debt forgiveness as well for employees of non-profits and public service careers. Congrats to your child, and good luck.

[Reply]

» Financial SamuraiNo Gravatar said: { Apr 19, 2010 - 08:04:53 }

Excellent insight for students about to graduate Jesse. Good luck in whatever path you choose. Just remember to get in first and leave last for at least the first year!
.-= Financial Samurai´s last blog ..Don’t Have Children If You Can’t Take Care Of Yourself =-.

[Reply]

Jesse MichelsenNo Gravatar Reply:

Thanks Sam, I’ve been working in the IT field since high school, but who knows if that is the path I will stay on, regardless of my degree. You have to follow your current passion, right? And great advice, thanks!

[Reply]

{ Apr 10, 2010 - 09:04:30 } Yakezie Round-Up #3 | College for 10k
{ Sep 12, 2011 - 04:09:30 } The Pros and Cons of Going Back to College
{ Sep 13, 2011 - 10:09:57 } The Pros and Cons of Going Back to School


 
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