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Income-Based Repayment for Federal Student Loans
Earlier this year, the U.S. Department of Education rolled out a new repayment option for student loan borrowers that could significantly reduce the monthly payments on your federal student loans.
As of July 1, 2009, federal student loan borrowers have been able to apply for the new income-based repayment plan, which recalculates your monthly student loan payments using a new income-based formula.
Student Loans Eligible for Income-Based Repayment
As the name suggests, this new repayment option is determined by a borrower’s income: Income-based repayment sets a cap on your monthly student loan payments based on your income and family size.
The IBR plan was designed to provide a more affordable repayment option for borrowers struggling to meet the monthly payments on their student loans.
“We know many graduates are concerned about their ability to repay student loans in the current economic environment,” U.S. Secretary of Education Arne Duncan said in the Department of Education’s press release. “This new plan addresses the issue head-on by giving them the option of a monthly payment tied to their income.”
The IBR option is available for most types of federal college loans: Your Stafford loans, Grad PLUS loans, and federal student loan consolidations are all eligible, as long as the loans aren’t in default. IBR is not available, however, for federal parent loans (PLUS loans) or for consolidation loans that included a parent PLUS loan in the consolidation.
Calculating Income-Based Student Loan Payments
The IBR plan revolves around three key factors: your income and family size, and whether you hold a job in public service. Your income and family size are used to determine your monthly repayment amount. A public service job may qualify you for a shorter repayment period and partial loan forgiveness.
You can easily calculate what your monthly IBR payment would be in order to find out if you would be eligible for the IBR plan:
Find the federal poverty level guideline for a family of your size, and multiply by 150%.
Subtract your annual adjusted gross income.
Multiply by 15% — the resulting number is how much you would be expected to pay on your student loans over the course of a year.
Divide by 12 — the number you end up with is what you would pay each month on your student loans under the IBR plan.
If this final number is lower than your current monthly student loan payments, then you would qualify for the IBR plan. (If your IBR payment is higher than your current monthly payments, you would remain on your current repayment plan.)
If your family falls below the poverty line, you would owe nothing on your student loans for as long as your family remains below that income line.
The Public Service Student Loan Forgiveness Program
If you’re making reduced student loan payments under the IBR plan and you also happen to work in the nonprofit or public service sector, you may qualify for an additional benefit, the public service loan forgiveness program.
Under this part of the IBR plan, your repayment period could be capped at 10 years. The interesting part here is that the monthly payments on your student loans aren’t adjusted so that you pay back the full amount of your student loans in those allotted 10 years. Rather, after 10 years in a public service position, any balance you have remaining on your federal college loans could be forgiven, provided you were making each of your monthly IBR student loan payments during those 10 years.
In other words, your federal student loans would be absolved and considered repaid, regardless of whether the loans were actually repaid in full or not.
Be aware, however, that the public service loan forgiveness program is only available for Federal Direct Student Loans. If you took out your federal student loans from a third-party lender (through the Federal Family Education Loan Program) rather than directly from the U.S. Department of Education, you would need to consolidate your FFELP loans into a Federal Direct Loan before you would be eligible for the 10-year forgiveness option.
But you may still be eligible for partial forgiveness on your student loans even if you don’t hold a public service job. After 25 years, if you’ve been making IBR student loan payments for those years and you meet certain other requirements, any remaining balance on your student loans may be cancelled.