Income-Based Repayment: What It Is, How To Apply (2024)

For federal loan borrowers struggling to make ends meet, there may be a way to get some relief: Enroll in an income-driven repayment (IDR) plan. The income-based repayment (IBR) plan is the second-most popular IDR plan, following Revised Pay As You Earn (REPAYE). As of 2020, 2.75 million borrowers are enrolled in IBR, with $172.6 billion in student loans in repayment.

If you’re considering enrolling in IBR, here’s what you need to know about this student loan repayment plan.

What Is Income-Based Repayment?

Federal loan borrowers who cannot afford their loan payments may qualify for IDR plans, which base their monthly payments on a borrower’s discretionary income and family size. There are four different IDR plans, and IBR is a top choice for many borrowers. Depending on your income and family size, you could substantially reduce your monthly payments by choosing this repayment plan.

For new borrowers, meaning borrowers who took out loans on or after July 1, 2014, your monthly payment under IBR is set at 10% of your discretionary income. However, your payment will never exceed what your payment would be under a standard 10-year repayment plan. Your repayment term will be 20 years in length, regardless of whether your loans were for undergraduate or graduate study.

If you don’t qualify as a new borrower, your payment is capped at 15% of your discretionary income, but it will never be more than what your payment would be under a standard repayment plan. Your repayment term will be 25 years.

For IBR, the U.S. Department of Education defines your discretionary income as the difference between your household income and 150% of the poverty guidelinefor your family size and state.

Let’s say, for example, you live in Georgia, are married, have two children, and have an adjusted gross income (AGI) of $50,000 per year. The poverty guideline for your family size and state is $26,200.

First, calculate 150% of the poverty guideline—$39,300. Your discretionary income is the difference between 150% of the poverty guideline and your AGI, so subtract $39,300 from your AGI to get $10,700. If you’re a new borrower on or after July 1, 2014, your payment under IBR is 10% of your discretionary income, or $1,070. Divide that number by 12, and your monthly student loan payment is $89.17.

IBR and Loan Forgiveness

If you apply for IBR, you can use the repayment plan as a path for loan forgiveness. IBR can be used toward two different forms of loan forgiveness:

• IDR forgiveness. If you still have a loan balance at the end of your repayment term, the government will forgive the remaining amount. However, the discharged balance is taxable as income.
• Public Service Loan Forgiveness (PSLF). If you work for a qualifying non-profit organization or government agency full-time, you may be eligible for PSLFafter making 120 qualifying payments. Payments made under IBR count toward PSLF. The balance forgiven through PSLF is not taxable as income, so the savings can be significant.

Income-Based Repayment Plan Eligibility

Only loans whose payments are up to date qualify for IBR; defaulted loans are not eligible.

To qualify, the payment you would make based on your family size and income for IBR must be less than what you would pay under a standard repayment plan with a 10-year repayment term. If the amount is more, you wouldn’t benefit from IBR and you won’t qualify. In general, you’ll qualify for IBR if your federal loan balance is higher than your annual discretionary income.

Loans Eligible for IBR

The following federal loans are eligible for IBR:

• Direct subsidized loans
• Direct unsubsidized loans
• Direct PLUS loansfor graduate students
• Direct consolidation loansnot made to parents
• Subsidized and unsubsidized federal Stafford loans from the Federal Family Education Loan (FFEL) program
• FFEL PLUS loans made to graduate or professional students
• FFEL consolidation loans that did not repay any PLUS loans made to parents
• Perkins loans

The following federal loans are not eligible for IBR:

• Parent PLUS Loans
• Direct consolidation loans that repaid any PLUS loans made to parents
• FFEL PLUS loans made to parents
• FFEL consolidation loans made to parents

If you have federal parent loans, such as Parent PLUS Loans, your repayment options are limited. The only IDR plan available to you is income-contingent repayment (ICR). You must consolidate your loans with a direct consolidation loan before you can take advantage of ICR.

How to Apply for the Income-Based Student Loan Repayment Plan

To apply for IBR, you can submit the income-driven repayment plan request online, or you can fill it out and mail it. You also can contact your loan servicerdirectly and ask for an income-driven repayment plan request form.

You can select an IDR plan by name, or ask that your loan servicer place you in the one that will give you the lowest possible monthly payment. If you have multiple federal student loans, you have to submit a separate IDR request for each loan you have.

The application will ask for the following information:

• Your name
• Permanent mailing address
• Email address
• Phone number
• Tax return information (you can use the online IRS Data Retrieval Tool to directly transfer your tax information to the form)
• Federal Student Aid (FSA) ID

It may take your loan servicer a few weeks to process your request, and the servicer may place your loans into forbearanceduring that time. Forbearance means the loan servicer postpones your payments, but you won’t become delinquent or enter default.

IBR Recertification

Each year, you have to recertify your income and family size by the annual deadline. Your loan servicer will send you a notification ahead of time reminding you to submit your information.

If you miss the deadline while on IBR, your monthly payment will no longer be based on your income. Instead, your loan servicer will set it at what it would be under a standard repayment plan with a 10-year term, based on the original loan amount when you first entered into the IBR plan. Any unpaid interest will be capitalized—meaning it will be added to the principal—increasing the total cost of the loan.

You can only return to the IBR plan if you submit updated information and still qualify based on your new income and family size.

Income-Based Repayment Advantages

IBR has some distinct advantages over other repayment plans:

• It has a shorter repayment term than some other plans. For new borrowers on or after July 1, 2014, IBR has a shorter repayment term than certain IDR plans. IBR’s repayment term for all undergraduate and graduate borrowers is 20 years, whereas REPAYE forces you to make payments for 25 years if you used your loans for graduate school.
• You’ll pay less of your discretionary income. New borrowers will only pay 10% of their discretionary income under IBR. Borrowers under ICR have to pay 20% of their discretionary income, causing them to pay significantly more.
• It has a payment cap. Some IDR plans don’t have a payment cap, so your monthly payment could exceed what you’d pay under a standard repayment plan if your income increases. Under IBR, your payment will never be more than what it would be under a standard repayment plan.
• There is no marriage penalty. Unlike REPAYE, which always includes your spouse’s income when calculating your monthly payment, IBR will look solely at your income if you file your taxes separately.

Income-Based Repayment Disadvantages

While IBR can be beneficial for some borrowers, there are drawbacks to consider:

• Not everyone will qualify. IBR has stricter eligibility criteria than other IDR plans like ICR or REPAYE. Generally, your federal student loan debt has to exceed your annual discretionary income or it has to make up a significant portion of your annual household income.
• Parent borrowers aren’t eligible. Parent PLUS Loan borrowers aren’t eligible for IBR, even if they consolidate with a direct consolidation loan first.
• If you borrowed before 2014, you have a longer term and higher discretionary income requirement. IBR is less useful if you have older student loans. If you borrowed before July 1, 2014, you’ll pay a higher percentage of your discretionary income, and you’ll have a longer repayment term.

IBR Vs. Other Income-Driven Repayment Plans

Before applying for IBR, it’s wise to consider your other repayment options. There are three other IDR plans that may be a better fit:

• ICR: With ICR, you pay the lesser of 20% of your discretionary income and what you’d pay with a fixed 12-year repayment term, adjusted to your income. If you have the 20% discretionary income option, your repayment period is 25 years.
• Pay As You Earn (PAYE):Under PAYE, your payment is set at 10% of your discretionary income, but it will never exceed what your payment would be with a standard repayment plan. Your repayment term will be 20 years. Unlike with IBR, you must consolidate certain loans before you can qualify for PAYE.
• REPAYE: The monthly payment for REPAYE is set at 10% of your discretionary income. The repayment term is 20 years for undergraduate loans, and 25 years if any of your loans were used for graduate school.

You can use the federal Loan Simulatorto see what your monthly payment would be and how much you’d pay in interest over the life of your loan under each plan.