If you’re a student who’s just started college or if you’ve already graduated and are paying off your loans, it’s important to know about income-based repayment.
This is when the government allows borrowers to pay back their student loans based on their income. The amount that you pay is capped at 10% of discretionary income, which means that there will be no interest charges on this payment plan.
What is income-based repayment?
Income-based repayment (IBR) is a repayment plan for federal student loans that bases the monthly payment amount on your income. It’s available to all federal student loans, including direct and FFEL Loans.
If you’re an undergraduate or graduate student at least 25 years of age with no voluntary defaults on previous debts, IBR can make your monthly payments more affordable and help prevent defaulted loans from hurting your credit history.
Who qualifies for income-based repayment?
You qualify for income-based repayment if you are a new borrower on or after July 1, and have a federal student loan.
You must also have a partial financial hardship. The amount of your payment will be based on the amount of your income and debt, as well as whether you want to make interest payments while in school (deferment) or pay them all at once (in full).
If you choose to make interest payments while in school but still have some uncollected loans when it comes time for repayment, those remaining balances will be considered part of your financial hardship threshold and counted against your monthly limit.
If you do not meet these criteria if either one applies, you may still qualify for income-based payments under certain circumstances
See if you could qualify, without hurting your credit score.
To get an idea of how much you could save by switching to income-based repayment, it’s important to understand what your credit score means. Your credit score is a numerical representation of your financial health and ability to repay loans.
It’s calculated by pulling together information from all three major bureaus, Experian, Equifax and TransUnion, to give you a snapshot of how likely you are to pay back loans on time (and in full).
The higher this number is, the better; but it doesn’t necessarily mean that someone with less than perfect scores will qualify for IBR at all costs.
There are also other factors that affect how much money you’ll be able to borrow under IBR: namely whether or not your student loan servicer has approved any other repayment options for federal student loans before offering IBR;
If so, then those would be considered first when calculating interest rates and monthly payments based on income levels instead of just balances owed at graduation time (which can make things difficult).
What is the difference between income-driven repayment plans?
Income-driven repayment plans are the most common type of student loan repayment plan. They use your income as the basis for how much you pay each month, with certain exceptions.
- Income-contingent repayment plans require that you make payments based on your discretionary income (basically, the money you earn above a certain limit) and they can be combined with other loan types like consolidation loans or rehabilitation plans.
- Pay as you earn plans have an initial low payment amount, but increase gradually over time; this type of plan is often used by parents who want to help their children afford higher education costs in exchange for lower monthly payments than those required under incomes-based plans (which are harder for parents themselves to qualify for).
- Rehabilitation plans offer relief from defaulted loans if a borrower qualifies through an alternative program such as one offered by his or her school—but only if it’s signed off by both parties involved
What are the pros and cons of income-based repayment?
Income-Based Repayment (IBR) is a repayment plan that enables you to pay back your student loan in a way that fits your current income.
The idea behind IBR is simple: since your financial situation has changed since you took out a student loan, it’s possible for you to make lower payments than originally assumed.
Some of the pros and cons of this program include:
- Pros: You’ll be able to manage your monthly payments more effectively by taking advantage of lower interest rates and other incentives offered by the government—and then later being able to refinance them into something else if need be.
- Cons: If things don’t work out as planned, there could be unexpected consequences down the road when paying off these loans early on would have been preferable!
You can pay less for student loans with income-based repayment.
You can pay less for student loans with income-based repayment. You can reduce your monthly payment, interest rate and term of your loan. This can be an excellent option if you’re struggling to make your monthly payments or if your income is lower than expected.
You could qualify for forgiveness of your remaining balance after 20 years of on-time payments with a partial discharge or after 10 years with a full discharge. The downside is that this plan reduces the amount of interest you pay back over time.
Eligible Loans for Income-Based Repayment
The following types of federal student loans are eligible for income-based repayment:
- Federal Stafford loans (subsidized and unsubsidized)
- Federal Grad PLUS loans for parents, graduate students, and post baccalaureate students.
- You may not be eligible for its other uses, such as consolidation or private student loan forgiveness programs.
Capped at Percentage of Discretionary Income
One aspect of student loan repayment that’s often overlooked by borrowers is the amount of discretionary income they have left over after paying for basic living expenses.
The IRS has created a calculator to help you determine if your income is above or below the poverty line, which is determined by factors like family size and state median income.
The idea behind this policy is to encourage people with student debt to prioritize paying off their loans over other expenses when making financial decisions like buying a car or house.
If you’re able to pay off your loan faster than it would take for interest rates on new loans (which could mean saving thousands in interest), then it makes sense not only from an individual perspective but also from an economic one, you’ll have more disposable cash available for other things once the balance has been paid off completely!
Who Will Benefit from Income-Based Repayment?
Income-based repayment is a good fit for borrowers who have a high debt to income ratio, low income or no income.
People who have a high debt to income ratio: This includes those with high student loan balances and low incomes. If you owe more than the annual payment on your loans and the amount that you can afford each month with your current salary, you may qualify for an IBR plan.
People who have no or little income: In this situation, even though there is money available in your bank account at the beginning of each year (upfront), it isn’t enough to cover all of the monthly payments until next June (when they’re due).
You’ll need help from other sources such as scholarships and grants so that any remaining balance would be forgiven after 20 years instead of 30 years as normal repayment plans require.
Students who plan to work in public service and debtors with high debt and low income should choose the IBR programme. Large household sizes are also beneficial. It may be beneficial for borrowers to request an economic hardship deferral if they just have a brief loss in income.
The monthly payment under IBR will be zero if the borrower’s income is close to or below 150% of the poverty level. IBR will thereafter operate as a forbearance for the next three years and like the economic hardship deferral for the first three years.
The idea of a 25-year payback period may be intimidating to students who are not considering careers in public service. It is still important to think it through carefully, especially for students who may be considering adopting a graduated or extended payback plan.
For many low-income borrowers, IBR will probably offer the lowest monthly payment, and it is unquestionably a viable option to default on the loans.
Calculating the Benefit of Income-Based Repayment
To calculate the benefit of income-based repayment, you must first identify your discretionary income.
Discretionary Income: The difference between gross (or total) income and the minimum payment required to make payments on federal student loans. Discretionary income is used in calculating how much you can qualify for with each monthly payment option.
Gross Income: The amount of money coming into your bank account or paycheck each month including wages, bonuses, tips and other sources like Social Security benefits or pensions (if applicable).
The IBR programme requires making assumptions about future income and inflation rises, which can make calculating the cost of a loan quite difficult.
The robust Income-Based Payback Calculator offered by Finaid allows you to compare the IBR scheme with conventional and extended repayment.
You may evaluate the expenses in a number of situations, such as beginning off with a lesser income and subsequently transferring to a job that pays more.
Does Income-Based Repayment get forgiven?
It is possible to get your loan forgiven, but it is a long process. You must make 25 years of payments before you can qualify for forgiveness.
To be eligible for forgiveness, you must be working in a public service job that qualifies as essential; this includes positions such as firefighters and police officers.
Additionally, all of your payments must be made on time during each year that they are due (even if they were late).
If any one payment is not applied toward principal or interest owed by the federal government on their student loan balance then it will remain outstanding until paid off with future monthly payments under standard repayment terms.
What income is used for income-based repayment?
The amount of your payment is determined using your adjusted gross income (AGI). Your AGI is the same as your taxable income, which is the amount you receive after subtracting any deductions and exemptions from gross income.
For example, if Joe lives in a state with a high tax bracket and takes advantage of all available deductions to reduce his taxable income by $10,000 per year before calculating his AGI for purposes of calculating payments for student loan interest on loans taken out before July 1, 2017 seasonally adjusted average hourly earnings index level equals 100 ($20/hr). When he files taxes at year’s end he will pay $2k in federal taxes due plus whatever state and local property taxes may apply; all together this adds up to around $2k+/- depending upon how much tax relief was provided through various credits/deductions such as education credits etc..
What if I can’t afford my income-based repayment?
If you can’t afford your payments, there may be other options.
- You can temporarily suspend your payments until you find a better way to make them.
- You can change your repayment plan to one that’s less expensive or more affordable for you and your family.
- You can also change the amount of monthly payments that go toward principal and interest instead of just interest, which will lower what it costs over time (this is called principal reduction).
Conclusion
So, is income-based repayment right for you? If so, it’s important to understand the pros and cons. While the lower monthly payments can be a good thing, they also mean that you will have to make more payments over time.
They also don’t come without risk. If you lose your job or get sick, your eligibility may be revoked by the government. The decision should be based on what works best for your individual situation, after all, each student loan holder has different circumstances!
