Understanding Income-Based Repayment (IBR)

The Income-Based Repayment plan better known as IBR is one of the most popular federal student loan repayment plans.

IBR’s popularity comes from the fact that payments are based upon income rather than your loan balance. Making IBR even more popular is the fact that it can lead to student loan forgiveness.

Are there Multiple Versions of IBR?

Yes. There are two IBR plans: “IBR” and “IBR for New Borrowers.”

This article will focus primarily on the original IBR plan. If you recently finished school, you will want to check out the IBR vs. IBR for New Borrowers comparison.

How are IBR Payments Calculated?

IBR payments are set at 15% of your monthly discretionary income.

To determine your income, lenders will either calculate it based upon your two most recent paychecks or based upon your most recent tax return.

If you are using last year’s taxes, the process is quite simple. You can electronically authorize your lender to access the IRS records showing your income. The number they use for the calculations is your AGI, or Adjusted Gross Income.

Sherpa Tip: If you have a lot of “above the line” deductions, you will have lower payments.

The “discretionary” part of the income calculations makes things a little more complicated. The discretionary portion of your income is defined to be the amount you make above 150% of the federal poverty level. A full breakdown of the factors affecting discretionary income and its calculation is available here. The short version is that the bigger your household, the less discretionary income you have.

If you are married and you file your taxes jointly, your spouse’s income will be included in the calculations to determine how much you can afford each month. However, if you file your taxes separately, your spouse’s income will not be included. The math on the tax filing question gets especially complicated for couples who both have student loans.

The formula for monthly payments under IBR is the following:
.15 * (Yearly Discretionary Income) / 12

What are the student loan forgiveness options under IBR?

The two main forgiveness programs under IBR are Public Service Student Loan Forgiveness and the standard forgiveness option that applies to all.

If you work in public service, including government jobs and not-for-profit jobs, you can have your entire federal student loan balance forgiven after 10 years of eligible payments. IBR is an eligible repayment plan.

The icing on top of this great deal is the fact that, unlike most forgiven debt, debt forgiven under public service forgiveness is not taxable.

Sherpa Tip: Call your student loan servicer to discuss all of your student loan plans. Any step you can take to make sure you don’t miss any details is a good idea.

Even if you don’t work in public service, you can still qualify for student loan forgiveness under IBR. For the standard forgiveness programs, you need to make 25 years worth of payments to get the remainder of your balance forgiven. One thing to keep in mind with this approach is that the forgiven debt is treated as taxable income. Prepare for a huge bill from the IRS the year your loans are forgiven.

Is it possible to have a $0 payment on IBR?  Does it still count towards forgiveness?

The answer here is yes and yes.

If you make less than 150% of the federal poverty level (including those who don’t have a job at all), your monthly payment will be $0 per month on IBR. The best part about the $0 payments is that they still count as payments towards your Public Service or 25 Year forgiveness programs.

The important part is to make sure you are properly enrolled in IBR and not on a forbearance or deferment.

Is it possible to make too much money for IBR or get kicked off of IBR?

Yes, but this isn’t really an issue for most borrowers.

As long as you have a “partial financial hardship” you can sign up for, and stay on, IBR.

What is a partial financial hardship?

It is a surprisingly simple standard. If IBR enrollment saves you money on your monthly payments, you can sign up. If the standard 10-year repayment plan is the less expensive option, you make too much money to sign up for IBR.

How long does my IBR payment plan last?

12 months.

Each year borrowers are required to re-certify their income in order to stay enrolled in IBR. The good news is that the recertification process is easy.

How is monthly interest treated on IBR?

If your monthly payment is less than the monthly interest that your balance is generating, your student loan is growing rather than shrinking with time.

In accounting, this is called negative amortization.

One of the perks about IBR is that the interest that is generated each month is not added back into your principal balance. This means you do not have to pay interest on the interest. For larger balances, this can make a huge difference.

However, if you fail to re-certify on time and exit the IBR program, all of that interest is capitalized, meaning it gets added into your principal balance.  Even if you don’t fully understand the math, the important thing to remember is to re-certify on time each year. Failure to do so could be expensive. If you are in a situation where the balance is growing because of interest, the Revised Pay As You Earn Plan (REPAYE) might be a better option due to the interest subsidy.

More questions about IBR?  Feel free to ask in the comments section!