Income-Based Repayment is a plan that can reduce your monthly payments to help make your educational debt manageable. Income-Based Repayment (IBR) was established by the College Cost Reduction and Access Act of 2007 and calculates your monthly payment amount based on your income, rather than the amount you owe.
Income-Based Repayment can substantially reduce the amount you must pay each month on your federal student loans. Typically, if you earn less than you owe in federal student loans, you are eligible to choose IBR. For many borrowers in IBR, your monthly payment amount will be less than 10 percent of your income.
How does it work?
- There is no qualifying employment requirement for Income-Based Repayment.
- If you have a partial financial hardship, you may enroll in IBR for your eligible federal loans.
- Once in IBR, your loan servicer will calculate your monthly payment amount based on your income, rather than the amount you owe.
- As long as you have a partial financial hardship, you will pay these income-based amounts until you complete repayment or possibly earn forgiveness on your federal loans.
Example:* Jane Justice starts out owing $100,000 in eligible federal debt at 6.8% interest and takes a job that starts at $40,000.
Because she owes $100,000 and only makes $40,000, Jane has a partial financial hardship and is eligible for Income-Based Repayment (IBR). Jane enrolls in IBR. In her first year, Jane's monthly payments under IBR are $297 (as opposed to $1151 under standard 10-year repayment).
As Jane receives annual salary increases of 4%, her monthly payments under IBR gradually rise, and in year 10, her monthly payments are $447. As long as she has a partial financial hardship and remains in IBR, Jane will never pay more than 15% of her discretionary income.
* This example uses the 2009 Federal Poverty Guideline for a household of one.