Food for thought*: “Millions of students are senselessly defaulting on their debt while failing to take advantage of programs meant to protect them financially. And chances are, it’s the poorest, least sophisticated borrowers who are suffering worst.”
The students at risk of defaulting are not taking advantage of the programs meant to help them.
As shown in a table produced by the Consumer Financial Protection Bureau ( CFPB), fewer than a million students are currently enrolled in Income-Based Repayment (IBR) or its newer, even more generous cousin, Pay as You Earn. Both programs limit monthly payments based on earnings. They would help millions of additional borrowers … if only those borrowers knew about or used them.
With repayment plans available to many student borrowers, some of which cap monthly payments based on income (see below), it should theoretically be near impossible to default on a federal student loan. And yet it happens constantly. Among former students who started paying back their loans in 2009, 13 percent had defaulted within 3 years. A disturbing number of students are falling through the cracks.
I do not want to fall through the cracks, Misam. I also do not want you to fall through the cracks, reader! Below you will find great programs that I strongly recommend you look into if your student loan debt is high relative to your income.
What is Income-Based Repayment (IBR)?
Income-Based Repayment (IBR) is designed to reduce monthly payments to assist with making your student loan debt manageable. If you need to make lower monthly payments, this plan may be for you.
To qualify for IBR, you must have a partial financial hardship. You have a partial financial hardship if the monthly amount you would be required to pay on your IBR-eligible federal student loans under a 10-year Standard Repayment Plan is higher than the monthly amount you would be required to repay under IBR. Your payment amount may increase or decrease each year based on your income and family size. “Once you have initially qualified for IBR, you may continue to make payments under the plan even if you later no longer have a partial financial hardship”, according to FederalStudentAid.
Eligible Federal Loans:
The following loans from the William D. Ford Federal Direct Loan (Direct Loan) Program and the Federal Family Education Loan (FFEL) Program are eligible for IBR:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans made to graduate or professional students
- Direct Consolidation Loans without underlying PLUS loans made to parents
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- FFEL PLUS Loans made to graduate or professional students
- FFEL Consolidation Loans without underlying PLUS loans made to parents
Loans that ARE NOT ELIGIBLE:
The following loans are not eligibile for repayment under IBR:
- PLUS loans made to parents
- Consolidation Loans that include underlying PLUS loans made to parents
- Private education loans
Under this plan, your monthly payments are
- based on your income and family size;
- adjusted each year, based on changes to your annual income and family size;
- usually lower than they are under other plans;
- never more than the 10-year standard repayment amount; and
- made over a period of 25 years.
Advantages of IBR:
- Pay based on what you earn—Under IBR, your monthly payment amount will be 15 percent of your discretionary income, will never be more than the amount you would be required to pay under the 10-year Standard Repayment Plan, and may be less than under other repayment plans.
- Interest payment benefit—If your monthly IBR payment amount doesn’t cover the interest that accrues (accumulates) on your loans each month, the government will pay your unpaid accrued interest on your Direct Subsidized Loans or Subsidized Federal Stafford Loans (and on the subsidized portion of your Direct or FFEL Consolidation Loans) for up to three consecutive years from the date you began repaying your loan under IBR.
- Limitation on the capitalization of interest—While you have a partial financial hardship, interest that accrues but is not covered by your loan payments will not be capitalized, even if interest accrues during a deferment or forbearance.
- 25-year forgiveness—If you repay under IBR and meet certain other requirements, any remaining balance will be forgiven after 25 years of qualifying repayment.
- 10-year public service loan forgiveness—If, while you are employed full-time for a public service organization, you make 120 on-time, full monthly payments under IBR (or certain other repayment plans) you may be eligible to receive forgiveness of the remaining balance of your Direct Loans through the Public Service Loan Forgiveness Program.
Disadvantages of IBR:
- You may pay more interest—A reduced monthly payment in IBR generally means you will be repaying your loan for a longer period of time, so you may pay more total interest over the life of the loan than you would under other repayment plans.
- You must submit annual documentation—To set your payment amount each year, your loan servicer, the organization that handles billing and other services for your loan, needs updated information about your income and family size. You must provide the documentation or your monthly payment amount will be changed to the amount you would be required to pay under the 10-year Standard Repayment Plan, based on the amount you owed when you began repaying under IBR, and will no longer be based on your income. This amount will be higher than your prior IBR payment that was based on your income. If you do not provide the required income documentation, unpaid interest will also capitalize.
- You may have to pay taxes on any loan amount that is forgiven after 25 years.
Tools and Resources for IBR:
Want more detailed information about IBR?
- Download the IBR fact sheet.
- Browse the IBR Questions and Answers (Q&As). Q&As are grouped into six categories:
- General Information
- Eligible Loans
- Determination of IBR Monthly Payment Amount
- Married Borrowers
- Application Process
- Other information
*** If IBR is not right for you, contact your loan servicer to discuss other repayment options. You may be able to change your repayment plan to one that will allow you to have a longer repayment period. Also ask your loan servicer about your options for a deferment or forbearance or loan consolidation.