Everything You Need to Know About Income-Based Repayment (IBR)

What is IBR?

Don’t confuse the Income-Based Repayment plan (IBR) with Income-Driven Repayment plans (IDR). Income-Driven Repayments (IDR) refers to ALL student loan repayment plans that are based on your income and family size. IDR plans include Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Based Repayment (IBR).

There are currently two versions of IBR, typically referred to as New IBR and Old IBR.

Under New IBR your monthly payments are limited to 10% of your discretionary income, which is the difference between your adjusted gross income and 150% of the poverty guidelines.

Under Old IBR, your monthly payments are limited to 15% of your discretionary income, which is the difference between your adjusted gross income and 150% of the poverty guidelines.

New IBR Eligibility Requirements

Who is Eligible For New IBR?

New IBR is available to “New Borrowers” as of July 1, 2014. To be a “New Borrower,” you must have NO outstanding Federal Direct Student Loan, or Federal Family Education Loan (FFEL) balances as of July 1, 2014.

If you had a previous Federal Student loan and paid it off in its entirety before July 1, 2014, you would be eligible for New IBR on Direct Federal loans taken after July 1, 2014.

Income Requirements for New IBR

You must have a Partial Financial Hardship to be eligible for New IBR. The Partial Financial Hardship criterium is met when your calculated New IBR payment is less than your 10-Year Standard Repayment.

What Loans Are Eligible for New IBR?

Only William D. Ford Federal Direct Loans (Direct Loan) are eligible for New IBR. If it doesn’t say Direct in the name of the loans, it is not eligible.

Federal Family Education Loans (FFEL) are not eligible for New IBR. The reason is that there have been no new FFEL loans made since June 30, 2010.

Old IBR Eligibility Requirements

Who is Eligible For Old IBR?

Old IBR is available to all borrowers of Federal student loans. It does not matter when the loans were taken out.

Income Requirements for Old IBR

This is the same for both versions of IBR. You must have a Partial Financial Hardship to be eligible for Old IBR. The Partial Financial Hardship criterium is met when your calculated Old IBR payment is less than your 10-Year Standard Repayment.

What Loans Are Eligible for Old IBR?

All Federal Student loans are eligible for Old IBR. This includes both Direct Loans and FFEL loans.

IBR Monthly Payment Calculations

How Is the Minimum Monthly Payment Calculated Under New IBR?

With New IBR, payments are calculated based on family size and total household income. Your monthly payment amount is calculated as 10% of your household discretionary income. Your discretionary income is defined as the difference between your Adjusted Gross Income (“AGI”) and 150% of the poverty line amount for your family size and state.

How is the Minimum Monthly Payment Calculated under Old IBR?

With Old IBR, payments are calculated based on family size and total household income. Your monthly payment amount is calculated as 15% of your household discretionary income. Your discretionary income is defined as the difference between your Adjusted Gross Income (“AGI”) and 150% of the poverty line amount for your family size and state.

Based on both calculations, it is possible to qualify for $0 monthly payments.

What is the Maximum Monthly Payment of Old and New IBR?

Similar to Pay As You Earn (PAYE), IBR has a payment cap. The repayment amount on IBR will never be more than your 10-Year standard repayment amount. This is beneficial when your salary increases dramatically after residency.

What if You’re Married?

With both New IBR and Old IBR plans, if you are married, your spouse’s income is included in your monthly repayment calculation only if you file your taxes jointly. If you file your taxes married filing separately, only your income is used in the calculation of your monthly repayment. The ability to balance taxes with student loan repayments opens up many planning opportunities (and pitfalls) when determining the best repayment plan for you.

You can generate a reasonable estimate of your IBR repayment amount using the Repayment Estimator at the StudentLoans.gov website.

How To Apply For IBR

To apply for IBR, you start with submitting an Income-Driven Repayment Plan Request which is available on studentloans.gov.

If you filed taxes in the last two years, your application will pull the information from the IRS Data Retrieval Tool as a part of the application process.

In cases where your current income is significantly different from the income you reported on your recently filed tax return you can provide alternative documentation with a paper Income-Driven Repayment Plan Request and documentation of your income, such as a pay stub.

If you currently don’t have any income, you can indicate that on either the online or paper application. In this case, you’re not required to supply further documentation of your income.

The obvious planning point here is to apply for Income-driven repayment before your income increases and always file your federal tax return even if you owe no taxes.

How long does repayment taking using IBR?

There are only three ways you can approach repaying your student loans, either get them forgiven under Public Service Loan Forgiveness (PSLF), stretch the payments out as long as possible, or pay off the loans as quickly as possible.

IBR and PSLF

Both New IBR and Old IBR are qualifying repayment plans for Public Service Loan Forgiveness (PSLF) which can be earned after 120 qualifying payments while working for a non-profit or government entity. After ten years of qualifying payments, your remaining student loan balance is forgiven and is not taxable as income.

Long-term Repayment with Loan Forgiveness

If you make minimum payments under New IBR for as long as possible, any remaining balance is forgiven at the end of the 20-year repayment period of qualifying payments. Utilizing Old IBR in this manner, any remaining balance is forgiven at the end of the 25-year repayment period of qualifying payments.

If your situation makes sense to stretch payments out to the maximum length, both IBR plans are eligible. The full forgiven balance is taxable as income under current law. This technique can result in a significant amount of income taxes due at the end of the process.

Pay off Your Loans As Quickly As Possible

Utilizing an IDR plan during residency to keep your payments to a minimum and subsequently increasing your payments once your income increases is an excellent approach to getting your loans paid off as quickly as possible. Unless you are eligible for New IBR, you are probably better off using REPAYE or PAYE while in residency as they are based on only 10% of your discretionary income. Once out of residency, you can either refinance your loans or pay more than the required amounts.

Recertify Your IBR Repayment Plan Annually

You must recertify your income and family size every year. To recertify, you submit a new Income-Driven Repayment Plan Request.

If you don’t recertify your income by the deadline (which is 12 months from when you submitted your original application), your monthly payment will be adjusted to the amount you would pay under the 10-Year Standard Repayment Plan. Additionally, any unpaid interest will be capitalized (added to the principal balance of your loans). To understand this process in more detail, see our article Everything You Need to Know About Student Loan Interest Rates.

Before you can return to IBR, you must make at least one payment based on the 10-Year Standard Repayment plan. You can return to making IBR payments once you submit a new Income-Driven Repayment Plan Request.

Is IBR Right For You?

New IBR

Physicians who were fortunate enough to start medical school in the fall of 2014 with no undergraduate loans, will find that New IBR can be an attractive Income-Driven repayment plan. This is especially true for those physicians looking to take advantage of Public Student Loan Forgiveness (PSLF).

Old IBR

Old IBR, on the other hand, is almost never a good idea. Old IBR is based on 15% of your discretionary income, whereas PAYE, REPAYE, and New IBR are all based on 10% of your discretionary income. Anybody eligible for old IBR can qualify for at least one of the other IDR plans. You can take any ineligible loans, such as FFEL loans, and make them eligible by consolidating them into Direct Loans. NOTE: DO NOT consolidate your loans if you are currently on Old IBR and have gotten credit for PSLF eligible payments. A consolidated loan is considered a new loan and will erase any PSLF eligible payments you currently have.