Managing Student Loans

Income Based Repayment Plans (“IBR”) are part of a legislative enactment called the College Cost Reduction and Access Act of 2007.  IBRs became available for use in July 1, 2009. This plan may be a helpful tool for borrowers who have incurred substantial student loans but who work in lower paying jobs such as the arts or the public interest sector.

IBRs are only available for Federal student loan debt such as the Stafford, Grad PLUS and consolidation loans. IBRs are not available for Parent PLUS loans or consolidations that include a Parent PLUS loan or loans.

One of the big disadvantages of the income based repayment plans is that you must supply sensitive financial information, such as your tax return, annually to your lender. Your lender then calculates your monthly payment under the plan according to federal guidelines. Because the plan is fairly new, some of the lenders, such as Sallie Mae are still struggling with clarity in its implementation.

The plan caps your payment at 15%of your discretionary income. Discretionary income is defined as the difference between your adjusted gross income (AGI) from the prior year and 150% of the federal poverty line for your family and state. For example, let’s say that there are three members in your family and that you live in California. Let’s further say that your combined adjusted gross income is $50,000. The 2009 poverty threshold for a family of three is $18,310. You subtract $27,465 (150% of the amount) from $50,000 which equals $22,535. 15% of $22,535 is $3380/12 months or $281 monthly. For many borrowers, this monthly payment amount is significantly lower than their standard repayment amounts, providing significant debt relief.  It is hoped that this program will allow more borrowers to continue making student loan payments rather than defaulting on existing loans.

Interest continues to accrue on the loan and sometimes, the payment under the IBR does not cover the amount of interest that continues to accrue. Thus, over the lifetime of the loan, the borrower may end up paying more interest than under a standard repayment plan.  However, after twenty-five years of repayment, the loan is forgiven. At present, the amount forgiven is considered a taxable event and is taxed by the IRS as income.  There is a movement to change this part of the IBR. It seems ironic to forgive a debt with one hand and incur another with the other.

Further information can be obtained from the following websites: