If you’re coming out of college with student loan debt, you may feel like you’re not making enough each month to cover your living expenses and make your student loan payment. And in fact, you may be right — depending on your starting salary, you may need to drastically lower your student loan payment. But how?
An Income-Based Repayment (IBR) plan for federal loans may be a solution. The federal government offers IBR plans to help borrowers get lower monthly payments on their student loan debt. There are four types of income-driven plans:
- Revised Pay As You Earn Repayment Plan (REPAYE Plan)
- Pay As You Earn Repayment Plan (PAYE Plan)
- Income-Based Repayment Plan (IBR Plan)
- Income-Contingent Repayment Plan (ICR Plan)
One important note about IBR plans is that for you to qualify, you need to have borrowed money for school after July 1, 2014. If you’re interested in the IBR plan, here’s what you need to know.
How an IBR plan can help you manage debt
The IBR plan ties your student loan payment to your discretionary income — typically charging you 10% to 20% of your discretionary income — instead of basing it solely on how much you owe with your original loan term. The program provides you with a lower monthly payment by extending your loan term, which can make it easier to make those payments on time and in full.
It’s free to apply for an income-based repayment plan at www.studentloans.gov.
Is an income-based repayment plan right for you?
To use the IBR plan to help manage your student loan debt, you need one of the following loan types:
- Direct subsidized and unsubsidized loans
- Direct PLUS loans made to graduate or professional students
- Consolidated FFEL loans, not made to parents
- Federal Direct Consolidation loans that did not repay any PLUS loans made to parents
- Federal Perkins loans
You won’t be eligible for the IBR plan if you have:
- PLUS loans made to parents
- Direct Consolidation loans that repaid PLUS loans made to parents
- Private loans
The monthly payment on your federal loans must also be more than 10% of your income to qualify. You can use the Federal Student Aid’s repayment estimator to get an idea of the plans you qualify for and what your payments could be if you enrolled.
Know the pros and cons before you use the IBR plan
Income-based repayment can help you manage your student loan debt, because it lowers the monthly payment amount you’re required to make. You could also get student loan forgiveness on any balance you carry after the loan term ends (which, on the IBR plan, is 20 or 25 years).
But getting on a repayment plan likely means you’ll pay your loans over a longer period of time, which is how you’re able to pay less each month. That means you’ll pay more in interest over the life of your loan than you would if you stuck to your original payment amount and schedule.
And if you get student loan forgiveness, the IRS could consider the forgiven balance as taxable income. That means if $10,000 worth of student loan debt is forgiven, you’ll owe income tax on that sum.
Still, it’s probably better to consider an IBR plan if you’re struggling to make your current monthly payments on time and in full than to default. Defaulting on your student loans can cause you to lose eligibility for forgiveness plans, lower your credit score, and incur potential fees and legal action. Getting a more manageable payment that you can make each month will help protect your credit and will help keep you in good standing as a borrower.