What Is Income Based Repayment (IDR)? [Expert Advice]

Many borrowers often face the challenge of paying off their student loan debt. This might result from a lack of a solid education loan repayment plan or an inability to pay altogether. Some borrowers make their monthly instalments religiously, while others default on payments. It is important to consider adopting a program that will assess your financial state and student loan repayment ability depending on the size of your family and the expenses around that. This is called safe income-based repayment.

Furthermore, defaulting on student loans isn’t intentional. Multiple factors can influence challenges in loan repayment, but that can be solved if you plan a better repayment of education loans. The likes of IBR, ICR, and ISR are alternatives that borrowers can consider to improve their approach to the repayment of student loans. So, what is income-based repayment and how can it be of help to you?

Income-based repayment (IBR) is a student loan repayment plan designed to facilitate simple education loan repayment for students with lower salaries. Its model caps monthly payments at a friendly/lower percentage of the borrower’s discretionary income. The beneficiaries of IBR are individuals with financial difficulty, have a higher debt-to-income ratio, or pursue careers in the public service industry.

Income Based Repayment: Eligibility Criteria And Eligible Loans

Income-based repayment eligibility is based on two significant aspects: the type and status of the student loan. For status purposes, only up-to-date loans qualify for IBR, and defaulted loans are automatically disqualified from this pay-as-you-earn repayment approach. Borrowers are qualified for income-based loan repayment if the payment they would make based on income and family size is less than a 10-year repayment term payment under a standard repayment plan. Ideally, borrowers with lower annual discretionary income than their federal loan balance all qualify for IBR.

Eligible Loans	Ineligible Loans
-Direct subsidized loans-Direct unsubsidized loans-Direct PLUS loans for graduate students-Direct consolidation loans (not made to parents)-FFEL PLUS loans made to professional and graduate students-FFEL consolidation loans (that haven’t repaid any parent PLUS loans)-Subsidized federal Stafford loans (from the FFEL program)-Unsubsidized federal Stafford loans (from the FFEL program)-Perkins loans	-Parent PLUS Loans-Direct consolidation loans (that repaid any parent PLUS loans)-FFEL parent PLUS loans -FFEL parent consolidation loans

Calculating Monthly Payments

You can easily estimate your monthly instalment on an IBR plan using an income-based repayment calculator. Before proceeding to monthly payment calculations, you first need to estimate if you can be a beneficiary of the IBR plan using the U.S. Department of Education’s Loan Simulator. If you have a subsidized loan and the IBR monthly payment is less than the monthly accrued interest, the government pays the difference for the first three months to prevent your overall balance from increasing.

So, how is income-based repayment calculated? To commence your calculations, you have first to determine your discretionary income. This difference between your household income and 150% of the poverty guideline, factoring in the state and family size. This means you must calculate the adjusted gross income (AGI) and 150% of the poverty guideline separately. Once you have the difference, here are the terms to follow for getting the monthly payment:

• You’ll pay 10% of discretionary income if you’re a new borrower or had no outstanding federal student loan balances upon receiving a new loan and you borrowed the loan on or after July 1, 2014
• You’ll pay 15% of discretionary income if you borrowed your first loan before July 1, 2014

IBR and ICR have a similar structure of capping the monthly payment (income-based repayment interest and principal instalment) at a percentage of the discretionary income. However, the significant differences are in the percentages and definitions of discretionary income. Furthermore, ICR is only available in the Direct Loan program; in some cases, loan consolidation is required. On the other hand, IBR offers federally guaranteed student loans and direct loan income-based repayment programs.

Repayment Period And Loan Forgiveness

So, how does income-based repayment work? The repayment period varies depending on the monthly payment. Borrowers who pay 10% of discretionary income will have a repayment term of 20 years for both undergraduate and graduate loans. Borrowers who pay 15% of discretionary income will have a repayment term of 25 years.

Borrowers under the income-based repayment plan can use it as a path for loan forgiveness. The income-based student loan repayment can be utilized on two types of loan forgiveness:

• IDR forgiveness – borrowers with a loan balance after their repayment term will enjoy loan forgiveness. However, since the government will forgive the remaining amount, that discharged balance will be taxable as it counts as income.
• PSLF (Public Service Loan Forgiveness) – after making 120 qualifying payments, full-time employees of government agencies and qualifying non-profit organizations are eligible for PSLF. Payments under IBR count towards PSLF, and the balance forgiven through the latter isn’t taxable as income. 

Application Process And Documents Required for Income Based Repayment

The income-based repayment plan application is made by filling out and submitting the income-driven repayment plan request online or via mail. You can also consider contacting your loan servicer for the IBR plan request form. If you want to enrol to repay multiple student loans, you must submit separate IDR requests for each loan.

The information and documentation required for the application for income-based repayment for Indian students include:

• Name
• Phone number
• Email address
• Permanent mailing address
• Tax return information
• Federal Student Aid ID

NB: Processing the request takes a few weeks. At this time, your loan servicer might place your loans into forbearance, meaning your payments will be postponed, but you won’t enter default or become delinquent.

IBR Recertification

You have to recertify your family size and income every year by the annual deadline. Your loan servicer must send you a notification as a reminder. Failure to meet the deadline will change your monthly payment, as it will no longer be based on your income. It will be set at the rate you’d pay with a 10-year term standard repayment plan, reflecting the original loan amount upon enrolling on the IBR plan. Any unpaid income-based repayment interest will be capitalized (added to the principal), which increases the total loan cost. You must reapply and qualify for IBR to get back on the plan.

Pros And Cons Of IBR

The income-based repayment plan has its fair share of advantages and disadvantages.

Pros	Cons
-Has shorter repayment term compared to competitors -Has a payment cap -Borrowers pay less of their discretionary income -Zero marriage penalty -Available for both undergraduate and graduate loans -Eligible for forgiveness after 20-25 years -There’s flexibility to switch plans	-Not everyone qualifies -Borrowers before 2014 have higher discretionary income requirements and longer-term -Parent borrowers aren’t eligible -Payments are recalculated each year and might rise -There are no private student loans income-based repayment for IDR

Chart For Income Based Repayment Plan

Below is a reference chart for the IBR plan showing the maximum monthly payments for a sample range of incomes and family sizes.

Annual income	Family size
	1	2	3	4	5	6	7
$10,000	$0	$0	$0	$0	$0	$0	$0
$15,000	$0	$0	$0	$0	$0	$0	$0
$20,000	$24	$0	$0	$0	$0	$0	$0
$25,000	$86	$0	$0	$0	$0	$0	$0
$30,000	$99	$47	$0	$0	$0	$0	$0
$35,000	$141	$89	$36	$0	$0	$0	$0
$40,000	$183	$130	$78	$26	$0	$0	$0
$45,000	$224	$172	$120	$68	$15	$0	$0
$50,000	$266	$214	$161	$109	$57	$5	$0
$55,000	$308	$255	$203	$151	$99	$46	$0
$60,000	$349	$297	$245	$193	$140	$88	$36
$65,000	$391	$339	$286	$234	$182	$130	$77
$70,000	$DNQ	$380	$328	$276	$224	$171	$119

DNQ = Does not qualify

Switching Repayment Plans

Although IBR can be your first loan repayment plan, you can always consider switching student loan repayment plans whenever your repayment ability changes. You’re never locked into a single plan, and switching can be regarded as if your circumstances change and you want to pay off your loan faster.

IBR Vs. Other Income-Driven Repayment Plans

The income-based repayment plan differs from other plans in various ways. The table below highlights how IBR compares to ICR, PAYE, and REPAYE (which was upgraded to SAVE).

	IBR	ICR	PAYE	REPAYE	SAVE
Percentage of the discretionary income	10% – 15%	Up to 20%	10%	10%	5% – 10%
Repayment term	20 – 25 years	12 – 25 years	20 years	20 – 25 years	20 – 25 years

FAQs

Is Income-Based Repayment Worth It?

For people with low income, this is the best deal they can get.

How Is the IBR Payment Calculated?

It depends on the income and time you took your loan. The key factors are before or after 2014 for the timeline of your loan and 10 – 15% of your discretionary income.

What Is the Difference Between IBR and ICR Repayment?

IBR considers monthly payments of 10 – 15% of the discretionary income compared to up to 20% for ICR. IBR has a 20 – 25 year repayment term compared to 12 – 25 years for ICR.

What Are the Repayment Terms for IBR?

The key factors include meeting the income threshold and recertifying your income and family size annually. 

Is IBR and IDR the Same?

Income-based and income-driven repayment plans are similar.

What Is the Family Size for IDR?

It starts from one individual and goes to as many family members as possible.

What Is the One Advantage of the Income-Based Repayment Plan?

It favours people with small incomes, those in public service and non-profit making organizations.