Income-Based Repayment for Student Loans | Do You Qualify?

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Student loans can be confusing. To qualify for programs like Public Student Loan Forgiveness (PSLF), you’ll need to have the right type of job, the right type of loan and the right type of repayment plan.

Because you must correctly maintain all three over the course of 10 years, it’s unsurprising and simultaneously horrifying that only 1% of PSLF applicants have been approved.

The number one reason for rejection? Borrowers weren’t making payments on a qualified repayment plan over the entirety of their PSLF service period.

Today, we’ll take a deep dive into one of those qualified repayment plans: Income-based repayment.

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How Does Income-Based Repayment Work?

income based repaymentWhen you’re on an income-based repayment (IBR) plan, your payments will be based on your income. If you took out your first student loan before July 1, 2014, you will have to repay 15% of your discretionary income every month.

If you were a new student loan borrower on or after July 1, 2014, you only have to repay 10% of your discretionary income every month. Regardless of when you borrowed, your payments will never exceed the amount you’d pay on a 10-year, standard repayment plan. You must also have a high debt-to-income ratio.

If you’re paying 10%, you must pay for 20 years or until your loan is paid off. If you’re paying 15%, that number is bumped up to 25 years. If you file taxes jointly with your spouse, you will have to account for their income and student debt when calculating your discretionary income.

Once you’ve fulfilled your repayment term, any remaining balance will be forgiven. This forgiven amount is taxable on your 1040.

Who Qualifies for Income-Based Repayment?

All federally-issued student loans qualify for IBR, unless they were issued to parents. To qualify, you must have an income-to-debt ratio that makes the plan advantageous for you. If your monthly payments are the same as they would be on a standard repayment plan every month, IBR is a bad idea.

You’ll essentially be paying double for no reason as your term is extended over two decades with IBR rather than one decade when you’re on a standard repayment plan.

How is the Income-Based Repayment Calculated?

Let’s say you make $45,000/year and have $80,000 in student loans. If you took out your first loans in 2019, your interest rate would be 4.53% on a Direct Subsidized Loan. Over the course of ten years, you would pay $829/month on a standard repayment plan for a total of $99,493 over the course of your loan.

If you were on IBR, your monthly payments would be $219-$703/month depending on how your income changes over the course of your career. It would take 240 months to pay off, and you’d pay about $101,501 after all was said and done.

You’ll notice that while your monthly payments are usually smaller with IBR, you actually pay less over the course of your loan with the standard repayment plan. This is because even though your payments are smaller, you’ll end up paying them over a longer period of time with IBR, which ups the total repayment amount.

If you have a remaining balance on your student loans after repaying through IBR for 20 years (or 25 years if you took out your first loan prior to July 1, 2014,) your remaining balance will be forgiven. In our example, you would receive $44,694 of forgiveness — and a tax bill to go along with it.

If you want to figure out your own numbers, you can use this calculator from the Department of Education.

Alternatives to the Income-Based Repayment Plan

There are other income-driven repayment plans out there. Depending on the types of loans you carry, your income-to-student-debt ratio and other personal factors, something other than IBR may be right for you.

Pay as You Earn

Pay as You Earn (PAYE) requires you to have Direct Loans that were issued to you as the student. If you have an older type of loan, that’s okay — as long as you consolidate it into a Direct Loan. You must have taken your first loan out after October 1, 2007, and have received at least one disbursement after October 1, 2011, in order to qualify.

If you meet these requirements, you will only need to pay 10% of your discretionary income over the course of 20 years. Your monthly payment will never exceed what you would pay under a 10-year standard repayment plan.

When calculating your discretionary income, you will only have to count your spouse’s income — and/or student loan debt — if you file a joint return. At that point, any remaining balance will be forgiven and then taxed.

To continue our example, under PAYE your monthly payment on your $80,000 Direct Subsidized Loan would be $219-$703. You’d pay for 20 years, for a total amount of $101,501. At this point, you’d still have $44,694 left on your loan. That $44,694 would be forgiven and taxed.

In this specific example, things work out the same for PAYE or IBR. They both have lower monthly payments than the standard repayment plan. Plus you’d have twice as long to repay while only paying a couple of thousand dollars more over the entire term.

Revised Pay as You Earn

To qualify for Revised Pay as You Earn (REPAYE), you must have Direct Loans issued to you as a student. Older loans can be consolidated into Direct Loans if you decide that’s what’s best for you.

Like PAYE, you will pay 10% of your discretionary income over the course of 20 years, though loans for graduate or professional studies must be repaid over the course of 25 years. However, under REPAYE there is the potential that your monthly payment could be more than what you’d pay under a 10-year standard repayment plan.

With REPAYE, it doesn’t matter if you and your spouse filed taxes jointly or not; both of your incomes and debt loads will be taken into account. After you’ve reached the end of your term, any remaining balance on your loan will be forgiven and taxed.

If you have access to PAYE, you may want to use that program. If you have a sudden spike in income, your payments won’t be capped with REPAYE like they are on PAYE.

Income-Contingent Repayment

When you’re on an income-contingent repayment plan (ICR), you will pay 20% of your discretionary income every month. Your max monthly payment will never exceed the amount you would repay on a 12-year payment plan with fixed payments.

Only Direct Loans issued to students and Parent PLUS loans which have been consolidated into a Direct Consolidation Loan qualify for ICR.

Only those who file taxes jointly with their spouse will be required to count their spouse’s income and student loan debt in their discretionary income calculation. After 25 years of payments on ICR, any remaining balance on your loan will be forgiven and taxed.

Compared to your other income-driven repayment options, ICR payments on your $80,000 loan with a $45,000 starting salary would come to $542-$720/month. You wouldn’t need the entire 25 years to pay it off. You’d only be repaying for 13 years, at which point you would have paid a total of $108,533.

Because you pay your loan off in full, you won’t receive any student loan forgiveness. You also won’t receive a massive tax bill, though.

Comparing Repayment Plans

Lets compare how repayment of $80,000 in student loan debt with $45,000 starting salary looks for each repayment plan:

Standard Repayment Plan

  • Estimated Monthly Payment: $829
  • Total Amount Repaid: $99,493
  • Duration of Repayment: 10 years
  • Amount Forgiven: $0

IBR

  • Estimated Monthly Payment: $219 – $703
  • Total Amount Repaid: $101,501
  • Duration of Repayment: 20 years
  • Amount Forgiven: $44,694

PAYE/RePAYE

  • Estimated Monthly Payment: $219 – $703
  • Total Amount Repaid: $101,501
  • Duration of Repayment: 20 years
  • Amount Forgiven: $44,694

ICR

  • Estimated Monthly Payment: $542 – $720
  • Total Amount Repaid: $108,533
  • Duration of Repayment: Just over 13 years
  • Amount Forgiven: $0

PSLF

  • Estimated Monthly Payment: Pick from IBR, PAYE, RePAYE or ICR
  • Total Amount Repaid: $26,280 and $84,360
  • Duration of Repayment: 10 years
  • Amount Forgiven: Will vary depending on your income and subsequent payment amounts

In this specific scenario, IBR or PAYE appear to be the best options at first glance. However, remember that you’ll be paying taxes on over $40K worth of forgiveness in these scenarios.

If you pay through ICR, you pay a little over $7K more than you would with IBR or PAYE, but you also won’t be hit with a tax bill as there won’t be any balance left to forgive.

Depending on your salary, the amount of debt you’re carrying, the sector in which you work and the size of your household, the most advantageous repayment plan will be different for everyone.

Is Income-Based Repayment a Good Idea?

Income-based repayment will be a blessing for some borrowers, and a terrible idea for others. One of the primary factors in deciding if IBR is right for you is to consider your income versus your debt load. Some borrowers will find that 10%-15% of their discretionary income is more than what they would pay on a standard repayment plan.

In this situation, you would not want to be on IBR as it would take you twice as long to repay your loan and in the end, you’d pay more than twice as much total.

If you are seeking Public Service Loan Forgiveness (PSLF), you must be on an income-driven repayment plan such as IBR. If you are actually rewarded with PSLF, you will only have to pay for 120 months before your loans are forgiven.

Remember that you must have Direct Loans in order to qualify, and you’ll have to work full-time for the government or in the nonprofit sector throughout that 120 month repayment period.

In our example, someone who successfully pursued PSLF would make payments that added up to anywhere between $26,280 and $84,360 depending on how your income fluctuates over the first ten years of your career. Obviously, this lowest repayment amount would be ideal, bearing in mind that you will have to pay taxes on any forgiven portion of your loan.

You should also take potential salary loss from working in the nonprofit sector when considering this option, especially since only 1% of applications have been approved.

Learn More: Read our in-depth post on How Student Loans Work.

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