Income-based Repayment (IBR)


IBR is a federal student loan repayment plan that first became eligible to borrowers in October 2009. Payments are based on your income and are made for a maximum of 300 monthly payments over 25 years. Any amounts remaining after 300 monthly payments are forgiven.

Two factors determine your eligibility to repay under IBR:

  • Loan types: Most federal student loans (Direct, PLUS, Stafford, FFEL) qualify for payment under IBR. Federal Perkins and Health Professions Student Loans are also eligible if consolidated into a Federal Direct Consolidation loan. Check NSLDS.ED.GOV to confirm your loan types.
  • Partial financial hardship: You have a partial financial hardship (PFH) if the payments due under IBR are less than the payments that would be due under a standard 10-year repayment plan. A rule of thumb: If your debt exceeds your income, you likely demonstrate a PFH.

Calculating Your Payment Due Under IBR

Your payment under IBR is 15% of your “Discretionary Income.” Discretionary Income is used to measure income available after accounting for essential living expenses.

Two inputs determine your Discretionary Income:

  1. Your income, reported by:
    1. Your Adjusted Gross Income (AGI) from your most recently filed tax return (no more than two years old), or
    2. Alternate documentation of income, via a paystub or something similar annualized to estimate yearly gross income
  2. The U.S. Department of Health and Human Services (HHS) Poverty Guideline amount for your family size and state of residence, updated yearly and found here: http://aspe.hhs.gov/poverty
    1. Family size generally counts your spouse plus any other children/family members for whom you provide a majority of financial assistance
    2. As your family size increases, your discretionary income decreases, and your monthly student loan payment under IBR decreases

Officially, your Discretionary Income is the difference between your AGI and 150 percent of the HHS Poverty Guideline amount for your family size and state. Written as a formula:

Discretionary Income = Your Income – (150% × HHS federal poverty guidelines)

Let’s use the above formula to calculate your 2015 Discretionary Income for a family size of one and an AGI of $70,000 (from 2014 tax return). The 2015 HHS federal poverty guideline for a family size of 1 is $11,770:

Discretionary Income = $70,000 – (1.5 × 11,770) = $52,345

Your monthly IBR payment equals 15% of your Discretionary Income divided by twelve:

IBR = 0.15 × $52,345 = $7,852 per year or $7,852 ÷ 12 = $654 per month

This calculation reflects your MINIMUM monthly payment due under IBR. You can always pay more if your situation allows and it makes financial sense to do so.

You must provide yearly documentation of your income in order to remain in IBR. If you fail to provide timely documentation, your payment will revert to the standard 10-year repayment amount and any unpaid interest will be capitalized (see table and discussion below).

Monthly IBR payments due are often less than the interest that accrues each month. This is called negative amortization. With a low enough income (i.e. during an internship, residency or leave of absence, etc), it is even possible to have a monthly payment equal to zero under IBR. These zero amount payments still count towards the 300 monthly payments due before forgiveness.

With negative amortization, you may have principal and unpaid interest amounts remaining after 300 monthly payments over 25 years under IBR. If that is the case, your remaining debt is forgiven or “canceled” and treated as taxable income. The taxable amount will depend on the amount forgiven and your marginal income tax rate during the year of forgiveness.

Interest Accumulation and Unpaid Interest Accrual example for one year of repayment using:

  • Your starting federal loan repayment balance = $200,000 @ 6%
  • Your income = $70,000, Your family size = 1, and your IBR payment due = $654 per month

Payment #

Loan Principal

Interest Accumulation per month

Payment per month

Unpaid Interest Balance

1

$200,000

$999

$654

$345

2

$200,000

$999

$654

$690

3

$200,000

$999

$654

$1,035

4

$200,000

$999

$654

$1,381

5

$200,000

$999

$654

$1,726

6

$200,000

$999

$654

$2,071

7

$200,000

$999

$654

$2,416

8

$200,000

$999

$654

$2,761

9

$200,000

$999

$654

$3,106

10

$200,000

$999

$654

$3,451

11

$200,000

$999

$654

$3,797

12

$200,000

$999

$654

$4,142

Generally speaking, paying more than the minimum amount due under IBR will result in higher total repayment costs. If you are not able to pay your loans off in full prior to forgiveness, you’ll usually end up paying more in total than if you pay the minimum and save for the potential tax on forgiveness due after you reach the maximum repayment period. The more loan balance that you can push into forgiveness, the more you’ll reduce your total repayment costs, as long as you plan and save for the anticipated tax on canceled amounts. See the Forgiveness FAQ for more information.


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