The Student Loan Income Based Repayment Program
Details of the New 2009 Federal Monthly IBR Payment Plan
Aug 9, 2009
The U.S. economic downturn has been rough for many college students. With families struggling to pay for college, many students have had to rely more heavily on student loans. Unfortunately, well-paying entry level jobs are not easy to come by, which means that recent graduates are stuck with debts they cannot pay back.
To help alleviate this problem, the U.S. Department of Education started a new Income Based Repayment Plan (IBR), effective as of July 2009. This program caps student loan monthly payments based on the graduate's income level. The idea is that graduates will not have to devote an unmanageable percentage of their income on student loan payments.
How the Income Based Repayment Plan Works
The IBR is an optional plan. Graduates should talk to their lenders to find out if they qualify and if the plan makes sense for them. This program covers all federal student loans and loans that have been federally consolidated. It doesn't cover parent PLUS loans or any defaulted loans.
Eligibility for the Income Based Payment Plan is very easy to determine. If what a graduate would pay without the IBR is lower than what they would pay with the IBR, then he or she doesn't qualify. If the graduate would pay a lower monthly payment by using the IBR, then he or she qualifies.
Calculating Loan Payments
To determine a lender's payment amount, the program uses a formula that takes into consideration household income and number of dependents. Lower income means lower payments, as does more dependents.
For example, consider a recent college graduate who is unmarried and has no children lands an entry level job that pays $35,000 a year. Coincidentally, he owes $35,000 in student loans. Assuming an interest rate of 5.6%, his monthly loan payment will be about $235. Under the standard payback program, he would have to pay $381 a month.
Another example: a single mother with four children goes back to school to earn a master's degree, which allows her to land a job paying $55,000. To earn the degree, she accumulated $30,000 in student loans. Under the new IBR, this graduate would only have to pay $205 a month. Under the standard repayment plan, she would owe $327 a month.
Of course, loan payments change as a graduate's income changes. A salary hike means higher monthly payments, and vice versa. A change in the number of dependents can also change the amount of monthly payments. Because of this, lenders will require annual paperwork to allow them to adjust the payments.
Interest Payment Benefit
One problem with any program that allows for lower loan payments is that over time, more interest will accumulate, and the loan period may be extended dramatically. The IRB attempts to reduce this problem through its Interest Payment Benefit. This means that if a graduate's monthly IRB payment doesn't cover all the interest owed that month, the government will pay the difference for up to three years.
Moreover, IBR payments are not eternal. After 25 years, if the loan is not paid off, the remainder is forgiven.
Loan Forgiveness Benefit
Graduates who use the IBR plan are eligible for the Public Service Loan Forgiveness Program. This programs allows graduates to cancel any remaining loan payment after 120 payments (which equals 10 years) if they work in qualifying public service jobs.
Taking Advantage of the Income Based Repayment Program
To determine eligibility for this new program, or to discuss whether this is the best repayment option, graduates should talk directly to their lenders. For many graduates, the IBR plan may make it significantly easier to pay off student loans.
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