The Income Based Repayment (IBR) plan can help borrowers who have a heavy debt load. The IBR plan calculates your monthly payment based on your income, family size and state of residence. This new payment amount is recalculated every year based on changes in income and family size. After twenty or 25 years of repayment (depending on when you borrowed), any remaining balance will be forgiven, but you may need to pay taxes on that amount
Income Based Student Loan Repayment Plan
The Income Based Repayment plan is a way to lower a borrower’s monthly payment amount by calculating the payment from discretionary income.
Discretionary income is the amount of money you have left over after paying for your basic needs, including food and shelter. The poverty line is a federal guideline that determines how much money someone needs to live on each year. For example, if your discretionary income is $1,000 less than the poverty line for your household size, then you could qualify for an income-based repayment plan.
If you make more than $1,000 above the poverty line and are applying for an income-based repayment plan, here’s what happens:
- Your monthly payment will be calculated as 10% of discretionary income (this does not include taxes or loan fees).
- If there are no taxes or loan fees owed on your account at the end of each year in which you were required to pay them (e.g., if they were already paid), then those payments will be included in determining how much money was actually paid toward principal during that time period.
Discretionary income is defined as any income that exceeds 150% of the poverty guideline for the borrower’s family size and state/location.
- Discretionary income is the amount of money you have available for spending and saving after your expenses. Some examples of discretionary expenses include food, shelter, clothing and transportation.
- You can determine your discretionary income by subtracting 150% of the poverty guideline from your total income.
- The U.S. Department of Health and Human Services (HHS) determines poverty guidelines annually based on family size and state/location. You can use this online tool to calculate how much you may qualify to make per month in order to qualify for IBR: https://studentaid.ed.gov/sa/repay-loans/ibr/calculate-your-payment#!/.
- If you meet the eligibility requirements listed above, then you will also need to sign up for an IBR plan through Nelnet on their website: https://www1.nelnetstudentloans…
This new payment amount is recalculated every year based on changes in income and family size.
Your income-driven payment plan payment amount is reported to the Internal Revenue Service (IRS). The IRS will tax your monthly payments as though they were income, and may make you pay extra taxes if your payments go over a certain amount. If you are enrolled in an income-based repayment plan, the following information provides the basic details about how it works:
- Your monthly payment amount is calculated by taking 15% of your discretionary income, which is defined as your adjusted gross income minus 150% of the poverty guideline for your family size and state/location. Recalculation of this percentage every year based on changes in income and family size.
After 20 or 25 years of repayment (depending on when you borrowed), any remaining balance will be forgiven, but you may need to pay taxes on that amount.
After 20 or 25 years of repayment (depending on when you borrowed), any remaining balance will be forgiven, but you may need to pay taxes on that amount. If your loan is forgiven after 20 years, you may need to pay taxes on the amount that was forgiven. If your loan is forgiven after 25 years, it’s possible that no portion will be taxable and that the entire balance will be considered taxable income in the year in which it occurs. You can find more information about student loan forgiveness plans from the IRS website [here](https://www.irs.gov/pub/irs-pdf/p76s1094pk6_2019_20th_Annual_Tax_Guide__Revised).
Currently, interest continues to accrue and will capitalize onto the principal if not paid while in school, during grace periods and deferments, and during a period of repayment under IBR or PAYE. Interest that capitalizes increases the overall principal balance of the loan.
- Currently, interest continues to accrue and will capitalize onto the principal if not paid while in school, during grace periods and deferments, and during a period of repayment under IBR or PAYE. Interest that capitalizes increases the overall principal balance of the loan.
- If you have subsidized loans, your repayment month is based on your annual income. For example, if your adjusted gross income (AGI) is $45000-49000 or higher for 2019 ($25000-29999 for 2018) then your monthly payments on subsidized loans will be $0 until they are paid off in full.
The IBR Plan can dramatically change your monthly payments for the better.
Once you’ve calculated your discretionary income, the next step is to apply for an income-based repayment plan. There are several ways to do this, but for the purposes of this article we will focus on filling out a Federal Student Aid Application.
The application can be found here: https://studentaid.ed.gov/sa/repay-loans/understand/plans
Once logged in, go to “Your Repayment Options” and fill out the form with your information. When asked if you want to pay more than currently required by monthly installments or pay off loans faster through loan forgiveness after 10 years under standard repayment plans (but not dischargeable), select “Yes”. This will take you to a page where it asks how much money per month they want students paying back based on their annual income range (postdocs with fellowships can choose between $0-$20k). You should then get an estimated amount based on what they estimate your monthly payment would be under standard repayment plans (without any changes made) or IBR plan options available at that time (see below).
If approved for an Income Based Repayment Plan option by one’s lender(s), one’s payments may be reduced dramatically compared with those under standard repayment plans over time depending on one’s financial situation as noted above; however eligibility criteria vary depending on whether one has federal loans only or both private & federal loans.”
The IBR Plan can dramatically change your monthly payments for the better, but it does come with some risks. You may have more difficulty paying off your loans if you aren’t able to pay enough each month or if interest continues to accrue and capitalize onto the principal balance. However, if you think that this plan is right for you and want to learn more about how it works, talk with an expert financial planner today!