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Advanced Income Based Repayment (IBR) Strategy

PAYE and REPAYE are better options for many borrowers, but there are times when IBR offers the lowest monthly payment and the fastest path to debt freedom.

Written By: Michael P. Lux, Esq.

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The Income-Based Repayment Plan is one of the best options for dealing with your federal student loans. Today we will be taking a step beyond the basics of signing up, who is eligible, and how the plan works. Instead, this article will focus on methods to ensure you are getting the lowest payment possible and maximizing the usefulness of the IBR plan.

If you need a refresher on IBR and how it works, check out our article about the IBR basics, and the Department of Education’s page on Income-Driven Plans.

And now for some advanced tips…

Leverage IBR to attack debt.

The great feature of IBR and the other income-driven plans, such as REPAYE and PAYE, is that your monthly payments have nothing to do with how much you owe. Instead, they are based on what you make.

Even if you can afford the higher payments of the standard 10-year repayment plan, signing up for lower payments through IBR could result in a huge savings. This is especially true for people with high-interest private student loans.

The surest path to student loan elimination is to pay the minimum on all of your loans except one. With the one remaining loan, you attack with every spare penny you have. Once that loan is eliminated, you pick a new loan to attack.

If you are attacking a high-interest private loan, the lower payments on IBR free up more cash each month to attack the high-interest loan. The sooner the high-interest loan is paid off, the less is spent in the long run.

Focus on your AGI.

The magic number for IBR calculations is your Adjusted Gross Income on your federal tax return. This number is very different from your actual income.

By taking advantage of “above the line” tax deductions you not only lower your tax bill each April, but you can also reduce your monthly student loan payment.

A good example here is a tax-advantaged retirement plan. If you contribute to a 401(k), you save money from retirement, avoid taxes on it, AND lower your student loan payments for next year.

Remember the most important goal.

When picking a repayment plan, you should not be just looking for the lowest payment. The goal is the elimination of debt. IBR is helpful with debt elimination in a couple of ways.

First, as we already noticed, you can use the lower payments to attack higher interest debt.

Second, IBR is eligible for student loan forgiveness options such as Public Service student loan forgiveness.

Most people will want to use IBR to either pay as little as possible on the march to forgiveness OR as part of a plan to aggressively pay off their debt as fast as possible.

Bottom line, unless you are planning on having someone else pay off your debt, your focus should always be on getting it eliminated… not just paying as little as possible each month.

Keep an eye out for other options.

For years, IBR was without a question the best option available for federal borrowers. Repayment plans created during the Obama administration mean that IBR is no longer the premium option for many borrowers.

If you took out your first student loans after October of 2007, you are likely eligible for the Pay As You Earn plan (PAYE). This plan requires only paying 10% of your discretionary income where IBR requires 15%.

After PAYE, the Revised Pay As You Earn plan (REPAYE) was also created. This plan removes the time-based restrictions of PAYE, freeing up more borrowers to take advantage of the 10% of discretionary income option. Unfortunately, the way spousal income is calculated is different. If you are married and your spouse does not have student debt, IBR may still be the best option.

The most important takeaway here is that these plans change. Always keep an eye out for the latest and greatest plan because it could save you a bundle.

If you are married…

Due to the addition of the PAYE and REPAYE plans, IBR is now the lowest payment option only for a certain segment of borrowers.

However, if you are married, and your loans are not eligible for PAYE, and your spouse does not have federal student loans, IBR is definitely worth exploring.

The math here is a little tricky, but it can be done. First, figure out what your monthly payments would be on the Revised Pay As You Earn plan. Next, figure out how much your IBR payment would be if you included just your individual income. Finally, figure out how much extra you would pay in taxes to file separately.

If signing up for IBR and filing taxes separately saves money compared to signing up for REPAYE, IBR could be your best option.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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