Student Loan Income Based Repayment Plans

There are two main types of federal student loans. One is a Federal Family Education Loan (FFEL). Also called “guaranteed student loans” – and currently being phased out, by the way – these are loans made by private lenders, guaranteed by the government. The other is a William D. Ford Direct Loan, known informally as simply “direct student loans,” where the government itself is the lender. (Aside from these federal loans to students, it is possible to borrow from private lenders without a government guarantee. There is also a program for parents to borrow to pay educational costs of their children.)

Until 2009, federal student loans were either paid back according to a conventional ten year repayment plan (with extensions allowed in some circumstances), or via an Income Contingent Repayment (ICR) plan.

A new program took effect in 2009 called the Income-Based Repayment (IBR) plan, adding another option. Like ICR, IBR allows some leeway for borrowers who are having trouble paying off their student loans due to insufficient income. IBR goes a bit farther in the borrower’s favor, however, for instance by lessening the accumulation of interest when payments are reduced.

But let’s look more closely at the IBR program:

IBR is available for both guaranteed and direct loans. (As opposed to ICR, which only is available for direct loans.)

To determine IBR eligibility and monthly payment size, you first ascertain the current official poverty rate for a family of your size, and multiple this by 1 and 1/2. Then if your Adjusted Gross Income is greater than this number, take 15% of that. (If your Adjusted Gross Income is equal or less than this number, use zero.) Divide this number by twelve. If the result is less than your monthly loan payment under a conventional ten year repayment plan, then you are eligible for the IBR program, and this would be your monthly payment.

Each year, this must be recalculated, because of course your income can change (as can the poverty rate, the size of your family, etc.). Any year where your IBR payment calculates out as more than what you would pay under a conventional ten year repayment plan, your payment would be the lesser amount. You can remain in the IBR program, but that particular year it would not reduce your payments.

When you pay back a loan, you’re paying both principal and interest. Depending on the size of the loan, the interest rate, how early you are in the repayment process, etc., sometimes most or all of your payment in fact goes toward interest. The beauty of IBR is that when your payment is insufficient to cover the interest, the government takes care of that for you for the first three years.

For example, let’s say under the conventional repayment terms this month you would have been required to make a $100 loan payment, with $25 going to principal and $75 going to interest, but that your income is low enough that your IBR payment is instead zero. In that case, only $25 carries forward and the rest is dropped. If it’s a direct loan, the government forgives the $75; if it’s a guaranteed loan, the government pays your lender that $75 for you.

If after 25 years in the IBR program you are still not done repaying your loan, the remainder – both principal and interest – is wiped away. It is thus possible, if your income never rises sufficiently above the poverty line, to never be responsible for paying back a dime of your student loan.

Consider this only a summary of the main points of the IBR program, and be sure to check out the sources below for more detailed information, with all the conditions, exceptions, fine print, etc.


“IBR Info”

“Income Based Repayment Questions and Answers (Q&As)”