Many student loan borrowers are eligible to lower their payments through Income Based Payment programs (IBR), but are unaware these programs exist. There are a couple great programs easily available. It is important to weigh all your options when trying to ease the student loan debt burden. Income based payment is a program designed to set payments in ratio to your income. Basically, put the loans into an amount you realistically can pay. What better reason to refinance when programs such Pay As You Earn and Income Based Repayment exist. The flexibility is realistic to your life situation. To be eligible for the Income Based Repayment and Pay As You Earn plans, you must demonstrate a “partial financial hardship”.
The first step in this program is to determine if you are eligible for an IBR plan. If you qualify for IBR, the following areas will determine your monthly student loan payment amount.
- Family size-How many people including you live in your household?
- Income-What was your Adjusted Gross Income (AGI) as reported on last year’s federal income tax return? If the AGI is unknown, estimate annual pre-tax earnings.
- Federal student loan debt-Did you receive your first loan on or after July 1, 2014?
- What is the interest rate of your federal student loan?
- What is your total amount of federal student loan debt? Use either the higher of either the total amount initially entered into repayment or the current outstanding balance.
- If you are married and your spouse has student loan debt, what is spouse’s outstanding balance?
- State of Residence
Additional information regarding IBR is available at TG Online.
Income Based Repayment is designed to suit diverse financial situations. Borrowers can choose to follow a 10 year standard repayment plan. This is a fixed monthly payment of $50 per month over the course of 10 years. The programs are as follows:
- Income Based Repayment (IBR): 25-year repayment plan that requires 15% (Not New Borrower after July 1, 2014) or 20-year repayment plan that requires 10% of your discretionary income (New Borrower after July 1, 2014); never requires more than the 10-year Standard Repayment Plan monthly payment amount.
- Pay As You Earn: 20-year repayment plan that requires 10% of your discretionary income; never more than the 10-year Standard Repayment Plan monthly payment amount.
- ICR (Income-Contingent Repayment):25-year repayment plan that requires the lesser of either what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income or 20% of your discretionary income.
An IBR is designed to make loan repayment more manageable. They provide lower monthly payments.
The IBR program also can include loan forgiveness, if there is a remaining loan balance after the 20 year term.
By paying student loans through one of the income-driven payment plans, the borrower may be eligible for the loan balance to be forgiven after 10 years of timely payments through the Public Service Loan Forgiveness Program. This applies to certain fields.
With either of the income-driven payment plans, the borrower is not locked into any fixed monthly rates. Payments will change as income changes, to make sure payments are always affordable. If there is no income, the payment will be adjusted to a zero amount and will still count as a timely payment on the loan.
The downside to these types of repayment loans are only a few, but should be taken into strong consideration. One con to an income-driven payment plan is the overall interest long term, could be significantly high in the lifetime of the loan. The trade-off of having affordable monthly payments is the total amount of interest accrued.
Also, there is a longer loan term involved. All three of the repayment plans extend to 20-25 years, which is twice as long as the standard 10 year repayments plan.
The taxes on forgiven debt are applied to the repayment debt. Any debt forgiven after the 20-25 year term is taxable and subject as income.
The borrower is required to provide income information on an annual basis. If the borrower forgets to contact the loan provider when income changes, they could be put back on the standard 10 year payment plan.
Remember, not all loans qualify for these income-driven repayment plans. Check with a qualified professional to discuss whether or not your loans are eligible. Visit studentaid.ed.gov