Income-Based Repayment (IBR)

Mark KantrowitzBy Mark KantrowitzBy Savingforcollege.com

Income-based repayment (IBR) is an income-driven repayment plan that bases student loan payments on 15 percent of the borrower’s discretionary income. The remaining debt is forgiven after 300 payments (25 years). Generally, borrowers whose debt at graduation exceeds their annual income will have a reduced monthly payment under IBR.

IBR is available for both loans in the Federal Family Education Loan Program (FFELP), otherwise known as the guaranteed student loan program, and the Direct Loan program. It is the only income-driven repayment plan that is available in both federal loan programs. IBR became available on July 1, 2009.

Second or Third Lowest Payments among Income-Driven Repayment Plans

Depending on the borrower’s situation, income-based repayment may yield the lowest monthly payment if the borrower is not eligible for Pay-As-You-Earn Repayment. The Revised Pay-As-You-Earn Repayment (REPAYE) plan has a lower percentage of discretionary income, 10% vs. 15%, but payments under IBR are capped at Standard Repayment and IBR is not subject to a marriage penalty, unlike REPAYE.

A borrower may have lower payments under IBR than under REPAYE if the borrower is married or if the borrower’s income increases.

Income-based repayment requires the borrower to pay 15% of discretionary income.

Income-based repayment defines discretionary income as the amount by which adjusted gross income (AGI) exceeds 150% of the poverty line.

IBR caps the monthly payment at the standard payment amount based on the loan balance when the borrower started IBR. So, when a borrower is no longer eligible for a reduced payment because their income has increases, IBR limits the monthly payment from growing larger.

The minimum monthly payment is $10.00 under IBR, unless the calculated payment is less than $5.00, in which case the monthly payment is zero. For example, if the borrower’s income is less than 150% of the poverty line, the monthly loan payment will be zero.


Loan Forgiveness

The remaining debt is forgiven after 25 years of payments (300 payments) under IBR. The forgiveness is taxable under current law.

Public Service Loan Forgiveness (PSLF) cancels the remaining debt after 10 years of payments (120 payments). The forgiveness under PSLF is tax-free under current law.

No Marriage Penalty

Like ICR and PAYE, but not REPAYE, IBR does not have a marriage penalty. If the borrower is married and files a joint federal income tax return with his or her spouse, discretionary income will be based on the joint income. However, if a married borrower files his or her tax returns as married filing separately, the loan payments will be based on just the borrower’s income.

Treatment of Accrued but Unpaid Interest

Borrowers can be negatively amortized under IBR, since the payments can be less than the new interest that accrues. This may lead to accrued but unpaid interest.

The federal government pays 100% of the accrued but unpaid interest on subsidized loans but not unsubsidized loans during the first three years under IBR. After the first three years, the federal government does not pay any interest on subsidized or unsubsidized loans under IBR.

Accrued but unpaid interest is not capitalized in IBR until loan status changes, such as when the borrower is no longer eligible for IBR or switches to a different repayment plan.


Example of Loan Payments under IBR

Consider a borrower who owes $30,000 in federal student loans with a 5% interest rate and has an AGI of $25,000 per year. The monthly payment under standard 10-year repayment is $318.20.

The 2019 poverty line in the continental U.S. for a family of one is $12,490. The borrower’s discretionary income is $25,000 – 150% x $12,490 = $6,265. 15% of this figure, divided by 12, yields a monthly payment of $78.31, much lower than the standard repayment amount.

The 2019 poverty line in the continental U.S. for a family of four is $25,750, greater than the AGI. Since discretionary income is negative, it is treated as though it were zero, and the monthly loan payment will be zero under IBR at this income level.


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