Income-Based Repayment

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Income-Based Repayment can substantially reduce the amount borrowers must pay each month on federal student loans.  Typically, if a borrower earns less than she owes in federal student loans, she is eligible to choose IBR.  For many borrowers in IBR, monthly payment amounts will be less than 10 percent of income.

How does it work?

• There is no qualifying employment requirement for Income-Based Repayment.

• If a borrower has a partial financial hardship, she may enroll in IBR for her eligible federal loans.

• Once in IBR, the loan servicer will calculate monthly payment amounts based on income, rather than the amount owed.

• As long as a borrower has a partial financial hardship, she will pay these income-based amounts until completing repayment or possibly earning forgiveness.

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.

There's much more to know about IBR and how it works, including important financial considerations, so be sure to sign up for an informational webinar to get the details!