Income Based Repayment (IBR) is a program developed by the Department of Education designed to make student debt more manageable by lowering your monthly payments based on a ratio of your income. This program is ideal for borrowers with low income compared to their debt.
"Pay as You Earn" Plan
The "Pay as You Earn" plan is an improved version of the Income Based Repayment plan that is aimed to help borrowers pay of their federal student loans relative to their earnings. The improved plan will reduce the monthly payment cap from 15 to 10 percent of your income and accelerate the time it takes for your loans to be forgiven from 25 to 20 years. This plan is available to borrowers starting December 21, 2012.
How much can you save?
Typically for most college graduates, you have a household size of 1 - yourself. If you're married, 2. If you're married with children, 3 or more.
Here is an example of potential savings with this program:
|Standard||Original IBR||"Pay as You Earn"|
|Monthly Payment Cap||$720||$297 ($423 savings)||$198 ($522 savings)|
|Potential Amount Forgiven||N/A||$156,927 after 25 years||$139,769 after 20 years|
It's important to note that household size is for you, the student. If you're living at home with your parents, their household size is however many people live in their house, but as you are responsible for your federal student loans, IBR is based on your personal household size and not your parents.
What about interest?
In some situations, your reduced payment under IBR may not cover the interest on your loans. If so, the government will pay that interest on your Subsidized Stafford Loans for your first three years in IBR. After three years and for other loan types, the interest will be added to the total amount you owe. While your debt may grow if your affordable payments are low enough, anything you still owe after 20 years of qualifying payments will be forgiven.
How do I know if I qualify?
Income based repayment is adjusted to your debt to income ratio. You may qualify for the "Pay as You Earn" program if you took out a federal student loan after October 1, 2007 and at least one on or after October 1, 2011 (Private student loans do not apply). Use the IBR calculator to determine if you are eligible for the Income-Based Repayment Program. If for some reason you don't qualify for the program (ask your lender) you may be eligible for non-student loan debt assistance.