If you read the May edition of Atlanta Tribune, you know that we promised this online supplement to our “Navigating Student Loans” story on page 51. Here’s Part One, provided by the U.S. Department of Education. In Part Two, we’ll post Income Based Repayement requirements for married borrowers.
Income Based Repayment – General Information
What is Income Based Repayment?
Income Based Repayment (IBR) is one of several repayment plan options for borrowers of student loans made under the William D. Ford Federal Direct Loan (Direct Loan) Program or the Federal Family Education Loan (FFEL SM) Program. If you qualify for IBR, your required monthly payment will be capped at an amount that is intended to be affordable based on your income and family size, and will be less than what you would have to pay under a 10-year Standard Repayment Plan.
What are the major benefits of IBR?
In addition to making your monthly loan payments more affordable, the IBR Plan offers other benefits:
- If your IBR payment amount does not cover the full amount of interest that accrues on your loans each month, the government will pay any unpaid, accrued interest on your subsidized loans for up to three consecutive years from the date you begin repaying the loans under IBR. (You are responsible for paying the interest that accrues on your unsubsidized loans during this 3-year period.)
- If you repay under IBR and meet certain other requirements, any remaining loan balance that you owe will be cancelled after 25 years.
- Payments that you make under IBR count toward the 120 payments that are required for the Direct Loan Public Service Loan Forgiveness (PSLF) Program.
What is the difference between Income Based Repayment (IBR) and Income Contingent Repayment (ICR)?
IBR and ICR share certain features, but there are also important differences between the two repayment plans. Similarities between IBR and ICR include the following:
- Both plans are intended to provide borrowers with an affordable monthly payment amount based on income and family size.
- Under both plans, any remaining loan balance is forgiven after 25 years.
- Parent PLUS Loans may not be repaid under either IBR or ICR.
- Payments made by a Direct Loan borrower under both IBR and ICR count toward the 120 payments that are required for Public Service Loan Forgiveness.
- In both IBR and ICR, your monthly payment amount may be adjusted annually based on changes in your income.
These are some of the major differences between IBR and ICR:
- IBR is available under both the FFEL and Direct Loan programs. ICR is available only under the Direct Loan Program.
- To initially qualify for IBR, you must have a “partial financial hardship” as described in Q&A #4. There is no comparable requirement for ICR. Any Direct Loan borrower (other than a parent PLUS borrower) may choose ICR.
- The amount of your loan debt is not considered in determining your IBR payment amount during any period when you have a “partial financial hardship.”
- Your monthly IBR payment amount is determined based only on your income and family size. In contrast, the monthly payment under ICR takes into account your total Direct Loan debt in addition to income and family size. The required monthly payment under ICR is generally higher than under IBR, and in some cases it may be higher than the monthly payment amount under a 10-year standard repayment plan.
- With both IBR and ICR, your calculated monthly payment may not cover the full amount of interest that accrues on your loans each month. Under IBR, the government pays the remaining unpaid accrued interest on your subsidized loans for up to three consecutive years from the date you begin repaying the loans under IBR. This benefit is not available under ICR. Under ICR, you are responsible for paying all of the interest that accrues on your loans.
- Under IBR, unpaid interest is capitalized (added to your loan principal balance) only if you are determined to no longer have a “partial financial hardship”, or if you choose to leave the IBR Plan. Under ICR, unpaid interest is capitalized annually.
How do I qualify for IBR?
To qualify for IBR, you must have a “partial financial hardship.” You have a partial financial hardship if the monthly amount you would be required to pay on your IBR-eligible loans (see Q&A #6) under a Standard Repayment Plan with a 10-year repayment period (based on the amount you owed on those loans when they initially entered repayment) is higher than the monthly amount you would be required to repay under IBR.
For example, if you owed a total of $40,000 in eligible student loans when the loans initially entered repayment, your monthly repayment amount under a 10-year Standard Repayment Plan would be $460 (using an interest rate of 6.8%). If your IBR payment amount (calculated as explained in Q&A #11), is less than $460, you would be eligible to repay your loans under IBR.
How can I determine if I qualify for the IBR Plan? Where can I get an estimated IBR monthly payment amount?
The U.S. Department of Education’s Student Aid on the Web Web site at www.studentaid.ed.gov includes an IBR calculator at http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRCalc.jsp.
The IBR calculator allows you to determine whether you are likely to qualify for the IBR Plan, and to estimate what your IBR monthly payment would be. However, for an official determination of your eligibility for IBR, or to apply for IBR, you’ll need to contact your loan servicer. Direct Loan borrowers may get additional information at www.dl.ed.gov. If you are unsure who holds your loans or who your loan servicer is, you can access the Department of Education’s National Student Loan Data System (NSLDS) Web site at www.nslds.ed.gov.
Income Based Repayment – Eligible Loans
Which Direct Loan or FFEL loan types can be repaid under IBR?
All Direct Loan and FFEL loan types except PLUS loans made to parents, consolidation loans that repaid PLUS loans made to parents, or defaulted loans may be repaid under IBR.
Are private loans taken into account when determining eligibility for IBR, and can private loans be paid under IBR?
Only non-defaulted federal loans made through the FFEL Program or the Direct Loan Program
(excluding PLUS loans made to parent borrowers or consolidation loans that repaid parent PLUS loans) are used to determine eligibility for IBR and only those types of federal loans may be repaid under IBR.
I consolidated my Stafford loans together with parent PLUS loans that I took out to pay for my child’s education. I know that parent PLUS loans may not be repaid under IBR, but am I eligible for IBR on the portion of the consolidation loan that repaid my Stafford loans?
A consolidation loan that repaid a parent PLUS loan may not be repaid under IBR even if the
consolidation loan also repaid one or more Stafford Loans.
I consolidated my eligible federal student loans with a private lender into a private consolidation loan. Are those loans still considered eligible loans for purposes of determining my eligibility for IBR?
Eligible federal student loans that have been consolidated with a private lender are no longer federal loans and therefore are not considered when determining your eligibility for IBR, and may not be paid under IBR.
If my loan is in default, can I repay it under IBR?
Defaulted loans are not eligible for repayment under IBR.
Income Based Repayment – Determination of IBR Monthly Payment Amount
How is the IBR monthly payment amount determined?
The IBR monthly payment amount is based on your annual Adjusted Gross Income (AGI) and family size. Specifically, the maximum annual amount you are required to repay under IBR during any period when you have a “partial financial hardship” (as discussed in Q&A #4 above) is 15 percent of the difference between your AGI and 150 percent of the U.S. Department of Health and Human Services’ (HHS) Poverty Guideline amount for your family size. This annual repayment amount is then divided by 12 to determine your monthly IBR repayment amount.
For example, 150 percent of the 2009 HHS poverty guideline amount for a family of three is $27,465. If your AGI was $40,000, the difference would be $12,535. Fifteen percent of that is $1,880; dividing this amount by 12 results in a monthly IBR payment amount of $157. As noted in Q&A #4 above, this compares with a monthly payment amount of $460 under a 10-year Standard Repayment Plan. If the calculated IBR payment amount using this formula is less than $5.00, the monthly payment amount is zero. If the calculated payment is more than $5.00 but less than $10.00, the monthly payment is $10.00.
Paying less each month under IBR seems like a good thing. Using the above example in Q&A #11, are there any downsides to paying less each month under IBR as compared to repaying under the 10-year Standard Repayment Plan.
As with any loan or credit program, having a lower monthly payment normally means that payments will be made for a longer period of time. This means that you will pay more total interest under IBR than you would pay under a 10-year Standard Repayment Plan. This is why it is important for each borrower to carefully evaluate whether IBR is the best repayment plan.
I claim my child every other year on my taxes as a dependent, but my ex-spouse has physical custody. I also pay child support and health insurance for my child. Do I count my child when reporting my family size?
The IBR definition of family size specifies that a borrower’s children are included if the child receives more than half of their support from the borrower. You may count your child when determining your family size if you provide more than half of the child’s financial support, regardless of who claims the child for tax purposes or who has physical custody. If you do not provide more than one-half of your child’s support you may not include the child in your family size for IBR purposes.
Will I always pay the same amount each month under IBR?
A14 Each year, your loan holder will review your current income and family size. If your income or family size has changed from the prior year, your monthly IBR payment amount may increase or decrease as a result of using the new income or family size information in the calculation described in Q&A 11 above.
What happens if my income increases so much that I no longer have a “partial financial hardship” as described in Q&A #4 above? Do I then lose eligibility to repay under IBR?
If your IBR payment amount increases to the point where it is more than the monthly amount you would be required to repay under a 10-year Standard Repayment Plan, you would no longer be considered to have a “partial financial hardship. In this situation, you may remain on the IBR Plan (to take advantage of some of the other IBR benefits, as described in Q&A #2), but your monthly payment will no longer be based on your income. Instead, you will be required to pay the amount you would have been required to pay under a 10-year Standard Repayment based on the amount of your eligible loans that were outstanding when you began repaying under IBR. Your repayment period based on this recalculated amount may be more than 10 years.
If I am repaying under IBR and my income increases so that I no longer have a partial financial hardship, but I stay in IBR and make the required, recalculated 10-year standard payment amount, is it still possible for me to receive loan forgiveness after 25 years?
As long as you remain on the IBR Plan (even if you no longer have a partial financial hardship) and you otherwise meet the requirements for loan forgiveness, you will qualify for forgiveness of any remaining loan balance at the end of the 25-year period.
What happens if, after it is determined that I no longer have a “partial financial hardship” and I am no longer making income-based payments (as explained in Q&A #15), my income goes down?
If your income later decreases so that your calculated IBR payment amount is once again less than what you would be required to repay under a 10-year Standard Repayment Plan, you will return to making income-based payments, as described in Q&A #11 above.
If my income goes down after I filed my most recent federal tax return (for example, because Ilost my job or am now working part time), does my loan holder have discretion to use my current income to determine my IBR payment amount, rather than the higher AGI amount that is shown on my most recent tax return?
If your loan holder believes that your most recent AGI does not reasonably reflect your current income, your loan holder is authorized to use alternative documentation of your income that you provide. You should inform your loan holder of the change in your financial circumstances.
What happens if my income as reported on my federal tax return changes after I begin repaying under IBR?
As long as you remain on the IBR Plan, your loan holder will annually review your current income to determine whether you continue to have a “partial financial hardship” and, if applicable, to adjust your monthly IBR payment amount. If your income increases or decreases there will generally be a corresponding increase or decrease in your required monthly payment amount.
What happens if my income significantly decreases well before the regularly scheduled annual review of my income? Do I have to wait until the annual review before my IBR payment can be adjusted?
You should alert your loan holder to your changed circumstances. If your loan holder believes that your AGI does not reasonably reflect your current income, your loan holder is authorized to use alternative documentation of your income that you provide, and may adjust your required monthly IBR payment at any time during the year based on that documentation.
Do Social Security disability payments count as income for IBR?
Social Security disability payments would be counted as income only if they are included as part of your AGI on your federal tax return in accordance with IRS requirements.
I have loans with more than one lender. How does each lender determine if I have a partial financial hardship, as discussed in Q&A #2, and if I have a partial financial hardship, how is my IBR payment calculated by each lender?
If you wish to repay all of your loans under IBR, you must apply to each lender/servicer separately. When you apply each lender will use the full amount of all of your eligible loans to determine if you have a partial financial hardship, even if some of the loans are held by other lenders. Each lender will adjust your IBR payment amount by multiplying your calculated IBR payment by the percentage of the total outstanding principal amount of your eligible loans that are held by that loan holder.
For example, if 60% of your total outstanding eligible loan balance is held by Lender A and 40% is held by Lender B, and your calculated monthly IBR payment amount is $140, you would be required to pay $84 per month to Lender A and $56 to Lender B.