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Drawbacks of Income-Based Repayment

Jul 15, 2013 Jennifer Williamson, Distance Columnist | 0 Comments

The Income-Based Repayment (IBR) program, introduced in 2009, reduces student loan payments for students who struggle to make them every month. The idea is to reduce your payments to less than 10% of your income, regardless of what your debt load is or how long that would take to pay it off. After a period of time—usually 10 to 25 years of reduced student loan payments—the government will forgive your loan.

To qualify, your normally-required monthly payment on IBR-eligible federal student loans must be higher than what you’d be required to pay under the IBR plan. Your family size and income also affect your ability to qualify, and the payment amount you qualify for.

The idea is to lessen the debt load of students who have heavy debt loads and low incomes, and are in at least partial financial hardship. But the Income-Based Repayment program can come with financial hardships of its own. Here are a few drawbacks.

You’ll actually wind up paying more

Just because your monthly payments are lower doesn’t mean you get a break on the interest. It still adds up over time, and ultimately it could mean you’ll be paying more than you would have if you’d paid off your loan faster—even if the government forgives your loan. Because of this, it’s best to consider the entire cost of the program over the total life of your loan or until the forgiveness period when deciding whether to sign up—not just the reduced monthly cost.

See Also: The In's and Out's of Student Loans for College

The payment doesn’t stay static

If you get into the Income-Based Repayment program and decide you don’t mind that more interest accrues over the life of the loan, get ready to do some paperwork. The program requires you to verify your income every year—and your payment will be continually adjusted upward to reflect an increase in earnings. In the worst-case scenario, you get a raise at work at the beginning of the year, then lose your job or take a serious cut in pay. In that case, you could be stuck with a higher payment in a year when your financial situation isn’t ideal.

See Also: Online College Degree Programs

There could be tax consequences

True, the Income-Based Repayment program lets you limit monthly payments on your student loans to what you can afford. But when your loan is forgiven, you may have an extra tax burden to pay. The law states that forgiven debt require income taxes—unless you work in a public service job or teach, in which case you would be enrolled in a different loan forgiveness program.

For many graduates, especially those with six-figure debt, the tax bill could be in the five figures—thousands upon thousands of dollars. And you will be expected to pay in full, as soon as you get the bill. 

Right now, this is mainly a theoretical problem. That’s because the Income Based Repayment program is relatively new, and nobody has received loan forgiveness under these terms yet. But according to the law, this scenario could affect millions of people who qualify for the program. And the Internal Revenue Service doesn’t allow people to reduce payment on their tax bills based on current income—there can be serious penalties for not paying the bill as soon as it becomes due.

It’s possible that as tax bills become due, this will become more of a politicized issue—and action will be taken on it in Congress. As more and more people receive large tax bills not long after they get their loans from traditional and accredited online schools forgiven, it’s possible that the outcry will gain more attention from politicians—and the public.


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