Income based repayment (IBR) is one of the most common types of repayment plans for federal student loans. This type of repayment plan bases the amount of the monthly payment of your loan on a level that is affordable to your family, based on your monthly income and the size of your family. Some may wish to consider this repayment plan when they consolidate student loans as well.
Many federal lending programs use an income based repayment plan. This includes Stafford loans and Grad PLUs loans. Most federally consolidated student loans may also use this plan if it was made under the Direct Loan program or the FFEL program. Some types of loans do not use this method. This includes parent PLUS loans, consolidated parent PLUS loans or any loans in default currently. An income based repayment can be used for both new and older loans. It is also available for all types of educational lending for undergraduate, graduate and other types of job training.
The income based repayment qualification is based on the affordability of the monthly payment to the student. In order to enter this type of plan, the debt from your student loans needs to be relatively high compared to your monthly income and family size. To qualify for this loan, your information plus your state are factored into a calculation, generally performed by the lending department.
When information is plugged into the equation, if the income based repayment monthly payment is lower than what you would be paying on your eligible loans, you may then repay the loans using the income based repayment. To qualify, the terms of the loan must be ten years and the repayment must be a standard repayment. If with this information your loan payment would be higher than the income based monthly repayment, you will be able to use the lower monthly payment.
There are several reasons why this repayment plan works best for some individuals. The monthly payment is less than it would be under a traditional repayment plan of ten years. However, the longer the repayment period is, the more expensive the loan will be (since there is more time for interests to compound on the principle borrowed.)
One of the benefits of this repayment plan has to do with the interest. If after calculating the income based repayment monthly payment that payment is less than what would cover the interest applied to the account each month, the federal government will pay the unpaid interest. This occurs on subsidized Stafford loans, including Direct Loans and FFEL loans. This may occur for up to three years.
In addition, after 25 years of paying towards the income based repayment plan, any remaining balance, including principle and interest, is cancelled. For those who work in an eligible public service job and make at least 120 payments while working full time in that position, the debt is cancelled after ten years.
The income based repayment plan is a good option for those who have qualifying student loans or who consolidate student loans that qualify. However, each year, you will be required to submit documentation showing your income and the payments sent. Without documentation, the loan reverts to a standard repayment plan.