Is Income-Based Repayment Right for you? | 04.21.10
If you are struggling to pay back your student loans, even after a consolidation, you might have wondered what are your options. One plan of attack is to apply for income-based repayment. But is it right for you?
What is income-based repayment? Basically, if your total student loan payments for the year is higher than 15% of your annual income, you can have your loan spread out further and your monthly payments lowered. So if you are making $35,000 a year, the maximum student loan payments you can make each month should be no higher than $132.91. If you are married, your eligibility for IBR is based on the combined annual income of you and your spouse. (To find out if your specific income qualifies, peruse our IBR chart here.)
Which of my loans are eligible for IBR? You can use IBR for all federal Stafford loans, GradPLUS loans and federal loans that have previously been consolidated. All private loans, including ParentPLUS loans, are ineligible. Any loan, private or federal, that is in default will not be eligible for income-based repayment as well.
What are some of the perks of IBR? Well, aside from getting a lower monthly student loan payment, if your IBR payment is less than the monthly interest that accrues on the loan, the government will pay your unpaid interest on for up to three years. If you are still making IBR payments after 25 years, your debt is forgiven.
Okay, so what’s the downside? Simply put, you will pay more interest for the life of the loan. The lower monthly payments may help in the short term, but it won’t do nearly as much to pay down your loan balance as a standard monthly payment. That means more interest is added to your loan each month, and it will take far longer to pay it off totally.
Further, you will have to report your income each year to be eligible for IBR. If your income goes up you may lose eligibility and have to go back to a standard repayment plan.
Image credit: National Collegiate Scouting Association on flickr.
ScholarshipPoints code: YESIBR
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