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Income Based Repayment Programs: Making Your Student Debt Load Lighter

Nov 20, 2009 Jennifer Williamson, Distance Columnist | 0 Comments


Every year millions of college students are thrust out into the “real world” with no concrete job prospects on the horizon—and an average of $22,000 in student loan debt to start paying off within six-months. Even in solid economic times, the prospect can be daunting to new graduates. But in a recession, the job outlook is even worse—and that six month grace period can start to feel like six minutes.

Of course, you can apply to have your student loans deferred for up to three years if you’re facing economic hardships—you’re unemployed or severely underemployed, or you have significant other debts to work out. But your student loans will probably be collecting interest while you defer—which will increase your burden later.

But in July 2009, that changed—with the introduction of Income Based Repayment (IBR) plans. These plans allow you to repay your consolidated student loans based on your income—within certain limits. Here are the answers to common questions about IBR’s.

Who’s eligible—and how do I find out?

Girl Holding Help Sign
Get ready to do some math. You’re eligible for an IBR only if you have so much debt that, under a conventional 10-year repayment program, you would have to pay over 15% of anything you earn above 150% of the poverty level. Check out the loan calculator at ( to see if your income and debt level meet eligibility requirements.

Even if your debt-to-income ratio proves eligible, you can’t join the program if you’ve ever defaulted on a student loan—and the program covers only federal loans. It doesn’t cover PLUS loans made to parents, however—only loans made to students themselves.

How does it work?

The IBR will calculate the amount you need to pay back on your student loans based on your income—your repayments will be limited to 15% of the amount you earn above 150% of the poverty level for the size of your family—which will be less than 10% of your income per year for most people.

If your income rises, the amount you have to pay per month will rise too. But if it falls below 150% of the US poverty level, you won’t have to pay anything on your student loans until your income starts to rise again.

What about interest?

When you sign up for an IBR, your interest doesn’t go away.

If you have a subsidized Stafford loan, which is given out specifically to students under economic hardship, the government will repay the first three years’ worth of interest while you’re in the program.

But if you have an unsubsidized government loan, you won’t get any help with the interest—and it will accumulate even when your income is low enough to reduce your payments to zero. For some people, the amount they’re required to pay per month may not even be enough to cover their interest.

However, after 25 years of qualifying payments, you’ll have all your federal student loan debt forgiven.

What’s the downside?

The downside is that even if the plan reduces your payments, you still have interest accumulating—and income based repayment plans do nothing to help you with private student debt.  Under an income based repayment plan, you’ll likely have more interest accumulated than you would if you made your regular payments every month.

The amount that’s forgiven under the program may be counted as taxable income—so it could affect your tax burden. And if you drop out of the program before the 25-year mark, you’ll have an enormous debt to contend with—because your interest has been accumulating.

Income based repayment programs aren’t an automatic out. Like most help for student loans, they have significant drawbacks—and they don’t apply to private loans. But in some cases, they can help you get your student loans under control. And if you stretch out your payments to last over 25 years, they can provide a light at the end of the tunnel. Do some research and talk to a finance professional about your options, and hopefully you can find a loan repayment strategy that works for you.

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