Income Based Repayment

Introduction

In this post, we will discuss the basics of Income Based Repayment (IBR), who is eligible, how to calculate eligibility and what the difference between IBR and Pay As You Earn (PAYE) are.

Who is eligible for IBR?

If you’re eligible, IBR can help you lower your monthly payments by capping them at 10 percent of your discretionary income. If you have other federal student loans, it’ll be 20 percent of your discretionary income.

Here’s how to find out if you’re eligible:

• You must have a partial financial hardship (meaning that the annual amount due on all of your outstanding eligible loans exceeds 15 percent of the difference between your AGI and 150% of the poverty guideline for your family size).
• You must have a high debt-to-income ratio (meaning that the total monthly payment on all of your qualifying federal student loans exceeds an amount equal to 25% or more than 12 times higher than the amount you would pay under a standard repayment plan).

How is eligibility calculated?

To qualify for income-driven repayment, you’ll need to meet the following requirements:

• Your annual income must be less than $50,000. This figure is based on your Modified Adjusted Gross Income (MAGI) as reported on your tax return. If you’re married and filing jointly, this figure is based on the combined incomes of both spouses.[1]
• You must have Direct Loans that originated prior to July 1st, 2014 (including Federal Family Education Loan Program (FFELP) loans), or loans made under the William D Ford Federal Direct Loan Program.[2]
• Your outstanding borrowing from federal student aid programs must be at least $30,000[3]. This means that if you took out multiple loans during college or grad school and consolidated them into one new loan after graduation without paying off any of your original balances first then they will not count toward eligibility unless they were taken out before July 1st, 2014.[4]

What loans are eligible?

• Direct Subsidized and Unsubsidized Loans
• Direct GradPLUS Loans
• Direct Consolidation Loans
• FFEL Consolidation Loans
• FFEL PLUS Loans
• Federal Perkins Loans, including any Federal Family Education Loan (FFEL) Program loan that you have consolidated into a Federal Perkins Loan, made on or after July 1, 2006. This includes loans made under the Defense Dependents’ Education Assistance Program (DEA). If you are a member of the Coast Guard, your loan may be eligible for this forgiveness program. Your eligibility will depend on whether you served after September 11, 2001. The Department of Veterans Affairs administers the program for veterans who served in an area designated by President Bush as a combat theater during Operation Enduring Freedom or Operation Iraqi Freedom or in support of those operations from September 11th, 2001 until August 31st, 2011; or have been diagnosed with PTSD (post-traumatic stress disorder) due to military service, or was exposed to mustard gas during WWI and has received compensation from VA due to this exposure, or have been exposed to radiation above normal background levels at Hiroshima/Nagasaki Japan between August 6th, 1945 through December 31st, 1946 while serving in the US Navy on active duty prior to June 27th, 1950

What are the differences between IBR and PAYE?

When you’re deciding between IBR and PAYE, it’s important to understand the similarities and differences between these two programs. Both plans will help you lower your monthly payments based on your income and family size.

> In general, PAYE is more generous than IBR: It forgives any remaining balance after 20 years of payment instead of 25 years. However, IBR offers more flexibility in terms of when you can pause or end your payments altogether. If you qualify for PAYE but not IBR (because, for example, your monthly payment under PAYE would be higher than what you pay under IBR), then it makes sense to choose the former program over the latter one.

You may be eligible for IBR

If you have a federal direct loan, such as a Stafford or Direct PLUS Loan, or if you are in default on any of those loans, you may be eligible for IBR.

If your family’s income is low enough and you meet other criteria set by the government, including that your monthly payments on IBR don’t exceed 20% of your discretionary income (as opposed to 25% for PAYE), then you are eligible. If so, contact your loan servicer to apply right away—the sooner you apply after being notified that you’re eligible due to low-income levels or being in default, the faster they will make an official determination about whether they approve your request.

Conclusion

We hope that you have found all this information helpful. Deciding whether to choose IBR or PAYE can be difficult and confusing, but it is important to make an informed decision, and we are confident that this guide has given you the tools to do just that. If you find yourself still unsure about which program would be best for your needs, we recommend contacting your loan servicer for further assistance. They will be able to answer any questions you might have and help you determine which repayment plan would work best for your situation.