New Income Based Repayment (IBR) Plan for Federal Student Loans
Government Student Loans
Part of a package of proposals outlined by the White House Task Force on Middle Class Families last month (January 25, 2010) was a proposal to enhance the Income-Based Repayment (IBR) plan, which was enacted as part of the College Cost Reduction and Access Act of 2007 and became available on July 1, 2009. The proposed improvements involve capping student loan payments at 10% of discretionary income and discharging student debt after 20 years in repayment.
These changes will be proposed as part of President Obama’s federal budget for the fiscal year starting October 1, 2010 (FY2011). The proposed modifications to the IBR may possibly come into effect sooner if they are added to the Student Aid and Fiscal Responsibility Act, which passed the House of Representatives in 2009 and is still pending in the Senate.
To understand the implications of these proposals, it is necessary to know what the Income-Based Repayment option is:
- IBR is an alternative to Income Sensitive Repayment (ISR) and Income Contingent Repayment (ICR), both of which continue to exist.
- All the major types of student federal loans are eligible for repayment under IBR (Stafford, Grad PLUS or Consolidation loans made under either the Direct Loan or FFEL program). Loans that are currently in default, parent PLUS Loans, or consolidation loans that repaid a parent PLUS Loan are not eligible, however. You can use the IBR option to repay new or old students loans for undergraduate, graduate, professional, job training.
- To qualify for IBR, a person must have a “partial financial hardship,” meaning that the monthly amount they would be required to pay on IBR-eligible loans under a 10-year Standard Repayment Plan should be more than the amount they would be required to repay under IBR. In other words, people who qualify for IBR will have required monthly payments that are less than what they would have to pay under a 10-year Standard Repayment Plan.
- Monthly IBR payment amounts are calculated on the basis of the borrower’s income and family size alone. They do not take into account the amount of debt (as opposed to the ICR repayment plan, for example). Lenders calculate a borrower’s eligibility and the monthly payments for eligible borrowers. Loan holders also review borrowers’ income and family size every year. As a result, IBR payment amounts may increase or decrease – but the required payment will never be more than the standard 10-year payment amount.
- Under IBR, the government pays the remaining unpaid accrued interest on subsidized loans for up to three consecutive years from the date a person starts to repay the loans under IBR.
- Presently, IBR caps monthly payments at 15% of the borrower’s monthly discretionary income (15% of the difference between a person’s Adjusted Gross Income, or AGI, and 150% of the federal Poverty Guideline amount for the person’s family size and state of residence). Last month’s White House Task Force proposal would bring this 15% down to 10%.
- Maximum repayment period under the IBR option is 25 years after which any remaining debt will forgiven. For public service employees, remaining debt is forgiven after 10 years of full-time service (as long as they have been making their monthly payments throughout this period). If the new White House proposals come into effect, debts will be forgiven after 20 years.
The IBR option provides the lowest monthly payments and is an excellent alternative to defaulting on student loans. This is especially suitable for:
- New college graduates who are unable to find employment at the levels they had expected,
- College graduates with advanced degrees (law school graduates, medical residents etc.) who have accumulated high levels of federal loan balances,
- Borrowers who are who are pursuing a career in public service,
- Borrowers experiencing financial difficulty in general.
To apply for IBR, you should contact your lender (if you have more than one lending service, apply to each one separately). To determine your eligibility, each lender will use the total amount of your eligible loans, including those held by other lenders.
Obviously, the faster you repay your student loans (or any loans), the less interest you will have to pay. By extending the repayment period to 25 years, the IBR option means you may be paying more interest over the life of your loan. Keep in mind though that although the initial sign-up period for the IBR plan is 25 years, you may pay off your loan anytime that you are able to do.