Is income-based repayment (IBR) for you? Pros, cons & eligibility

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Income-based repayment (IBR) is a federal program available to most federal student loan borrowers that can reduce monthly payments. Unfortunately, IBR is unavailable for private student loans.

When you apply, your loan servicer (The Department of Education) looks at your income and family size, then decides how much you can afford to pay on student loans each month. The monthly payment for an IBR plan is 10% or 15% of your discretionary income.

If you make on-time payments every month for 20 years (25 years in some cases), the remaining balance after that loan term is forgiven.

In this article, I’ll answer all your questions. If you want weekly tips on the best ways to handle student debt, sign up for my newsletter.

What is an Income-Based Repayment (IBR) plan for student loans?

An Income-Based Repayment Plan is one of several repayment plans the federal government offers to help student loan borrowers pay off their student debt in a timely manner without causing financial hardship.

You can’t enroll in IBR with a private student loan.

New borrowers only have to pay 10% of their discretionary income, unless that monthly amount is greater than your payment on the standard 10-year repayment plan. You’ll pay for a maximum of 20 years, at which point your remaining loan amount will be forgiven.

For individuals who held an outstanding balance on a federal loan on or before July 1, 2014, your monthly payment would be 15% of your discretionary income, and your maximum repayment term would be 25 years.

Every year, you must recertify your income and family size to remain on an income-based repayment plan.

What is the difference between IDR and IBR? The difference between IDR plans (income-driven repayment) and IBR plans (Income-Based Repayment) is that IBR is one type of income-driven repayment available.

The four types of income-driven repayment plans are:

  • Income-Based Repayment Plan (IBR Plan)
  • Pay As You Earn Repayment Plan (PAYE Plan)
  • Revised Pay As You Earn Repayment Plan (REPAYE Plan)
  • Income-Contingent Repayment Plan (ICR Plan)

Any payment made under these income-driven plans, including IBR, counts towards the Public Service Loan Forgiveness program (PSLF). This program forgives remaining student debt after 10 qualifying years of repayment — instead of 20 or 25 years.

Most of this information is relatively fresh. Many income-driven plans haven’t been around long enough for borrowers to reach the end of their repayment terms.

Yet, the US Congress hopes to change these income-driven plans for federal student aid — aiming to alleviate common student debt issues.

How can you graduate from income-driven repayment? You can “graduate” from IDR if 10%-15% of your discretionary income exceeds the monthly amount you would pay on a standard 10-year repayment plan or if you complete 20-25 years on the repayment plan.

Check out this article on Sallie Mae & Income-Driven Repayment for answers about Sallie Mae loans.

How IBR payments are calculated

The amount of your monthly IBR payments are calculated by taking 10% of your discretionary income — if you’re a new borrower. You could either use your adjusted gross income (AGI) or alternative documentation of income to calculate this number.

The total rises to 15% of your discretionary income if you are not a new borrower on or after July 1, 2014.

To qualify as a “new borrower,” you must have no outstanding balance on a Direct or FFEL loan. If you have a balance on a Direct or FFEL loan, you will have to pay 15% of your income, not 10%.

IBR payments are never more than the payment amount on a 10-year Standard Repayment Plan. If 10% of your discretionary income is already greater than the standard plan’s monthly payment, there is no benefit to enrolling in an IBR.

How much can you make and still be eligible for IBR? It’s difficult to give one answer, but generally, if your total loan balance is more than your annual income, you’re probably eligible for IBR. Factors to consider include your discretionary income after living expenses, family size, state of residence, and loan balance.

How long an IBR plan lasts

An IBR plan lasts for 20 years for new borrowers. Unless, of course, you pay your loan off early.

For anyone who had an outstanding balance on a Direct or FFEL loan on or before July 2014, you are not considered a new borrower, and your IBR plan will last 25 years.

Note that these are the maximum amount of years you have to pay. If you pay off your loan early, whether by making a lump sum payment or consistent monthly payments, you will not have to pay for the remainder of your maximum repayment term.

Are income-driven repayment plans forgiven after 20 years? All income-driven repayment plans are forgiven after 20 or 25 years, depending on several factors. As of March 2021, this forgiven amount is not taxable income. However, unless it’s renewed, this provision is set to end on January 1, 2026.

Eligibility requirements

If you have a federal student loan that’s not a Parent PLUS education loan, you’re (probably) eligible for an IBR plan.

What are the requirements for income-based repayment? The primary requirements for income-based repayment can be summed up in 2 terms.

  1. You must have a qualifying federal loan.
  2. Your federal student loan debt must be either greater than your yearly discretionary income or make up a large portion of your yearly income.

Here are some additional items to know about IBR eligibility:

  • Not all federal loans are eligible. Parent PLUS loans made to parents of undergraduate students are ineligible for IBR, as are Direct Consolidation loans that paid off undergraduate PLUS loans. Parent PLUS loans lent to parents of graduate or professional students do qualify for IBR.
  • Some loans need to be consolidated. Federal Perkins loans must be consolidated into a Direct Consolidation loan before being eligible for an IBR plan.
  • You need a certain debt ratio. 10%-15% of your discretionary income must not exceed the monthly payment amount on a standard 10-year repayment plan.
  • New borrowers get different terms. If you’re a new borrower as of July 2014, your monthly payments will make up 10% of your discretionary income, and you’ll have to make payments for 20 years. If you’re not a “new borrower,” it’ll be 15% of your discretionary income and take 25 years. Either way, you’re eligible, just not for the same payment amount.

How much will you pay each month on an IBR plan?

You will pay 10%-15% of your discretionary income each month on an IBR plan. It will never be more than the monthly payment amount of a standard 10-year repayment plan.

Each year, you need to update your annual income and family size. Changes will affect your payment amount.

If your income changes in the middle of a year, you can report those changes right away. It would benefit you to report loss of employment, for instance, to lower or even pause your monthly payments. Eligible $0/month payments still count toward that 20- to 25-year endpoint.

Benefits of income based repayment

Obviously, there are some significant benefits to this type of repayment plan for some borrowers. Those benefits include that:

  • IBR prevents you from paying exorbitant amounts on your student loans.
  • You might pay less over time because the remaining loan balance is forgiven at the end of the 20-25 years.
  • Periods of economic hardship deferment, repayment under other repayment plans, and qualifying payments of $0/month do count toward your overall repayment period.
  • Almost all federal student loans are eligible for IBR.

Cons of IBR plans

For more in-depth info on the disadvantages of IBR plans, read this article.

IBR vs. PAYE

PAYE stands for Pay As You Earn.

Both PAYE and IBR plans will never make you pay more than your federal student loan payment would be under the 10-year Standard Repayment Plan.

If you don’t recertify your income and family size by the yearly deadline, both PAYE and IBR will essentially place you on the 10-year Standard Repayment Plan until recertification.

PAYE plans will require you to pay 10% of your discretionary income, never 15% like some IBR plans.

PAYE plans will last 20 years, never 25 years like some IBR plans.

Subsidized and Unsubsidized Stafford loans are eligible for IBR plans. Federal Stafford loans are only eligible for PAYE if they’re wrapped up into a Direct Consolidation loan.

IBR vs. REPAYE

REPAYE stands for Revised Pay As You Earn.

REPAYE plans will require you to pay 10% of your discretionary income, never 15% like some IBR plans.

In some cases, your payment on a REPAYE plan may be higher than your payment under the 10-year Standard Repayment Plan. What you pay will always be based on your income and family size, even if your income rises above a certain point.

If you don’t recertify your income and family size by the deadline, under a REPAYE plan, you would be automatically placed under an alternative plan that is not based on income. This is unlike an IBR plan, which would (basically) place you on the 10-year Standard Repayment Plan.

Subsidized and Unsubsidized Stafford loans are eligible for IBR plans. Federal Stafford loans are only eligible for REPAYE if they’re wrapped up into a Direct Consolidation loan.

REPAYE plans last 20 years for undergraduate loans and 25 years for graduate or professional loans.

On the other hand, IBR plans last 20 years for new borrowers or 25 years for borrowers with an outstanding federal student loan balance as of July 1, 2014.

IBR vs. Income-Contingent Repayment (ICR)

Income-contingent repayment (ICR) is an income-driven repayment plan that calculates your monthly student loan payments based on the lesser of these two conditions:

  1. 20% of your discretionary income
  2. What you would pay on a repayment plan with a fixed monthly payment over 12 years, adjusted to your income

In some cases, your payment on an ICR plan may be higher than your payment under the 10-year Standard Repayment Plan. What you pay will always be based on your current income and family size, regardless of if your income rises above a certain point.

ICR plans take 25 years to finish, whereas IBR plans can take 20 or 25 years.

Parent PLUS loans and Direct Consolidation loans that paid off PLUS loans are only eligible for ICR plans, not IBR or PAYE or REPAYE.

How IBR impacts your taxes

IBR plans shouldn’t have a significant impact on your taxes, thanks to 2021 legislation.

At the end of 20 years (or 25 years for borrowers with outstanding balances before July 1, 2014), the remaining balance on your loan is forgiven. Before 2021, you would have to pay taxes on whatever amount is forgiven with your next federal tax return to the IRS.

However, in March 2021, Congress passed a $1.9 trillion stimulus package that made forgiven loans untaxable. (This will stay in effect until January 1, 2026, unless renewed.) You’ll no longer have to pay taxes on any forgiven loan balance — almost like cancellation.

How taxes impact your IBR: An income-driven plan like IBR should be based on your income tax return information. Both your income and number of dependents should match the info you provide for determining your monthly payment amount.

Filing as married or separately from your spouse may also impact your IBR plan.

Is IBR right for you?

If you’re worried you can’t make the monthly payments drawn out in the standard 10-year repayment plan, an IBR plan may be right for you.

If you don’t mind drawing out student loan repayment, and you don’t mind potentially paying more in interest, an IBR plan may be right for you.

As long as your income stays near the poverty line, your monthly payment will be very low. After 20-25 years, the remaining balance will be forgiven. Remember, you do not have to pay taxes on any forgiven loan balance — as of March 2021.

How to apply for Income-Based Repayment

To apply for the Income-Based Repayment (IBR), go to this studentaid.gov page and log in with your federal ID.

You’re likely eligible if your lender is the U.S. Department of Education and your discretionary income is below a certain threshold depending on your loan balance.

If you need any help applying for an IBR plan, or have questions about your student loan debt, schedule a free 10-minute call with me. I’m an experienced student loan attorney, and I’m ready to help you, just like hundreds of other borrowers that have seen me get results.

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