income-based repayment and federal student loansIncome not keeping pace with your student loan payments? Consider income-based repayment for a major win.

We’ve talked about the standard repayment options for federal student loans.  Though they offer flexibility, none can offer the same “bang for your buck” as the income-based repayment plan (IBR).

If you qualify, this could be exactly what you’ve been looking for.

Basics Of Income-Based Repayment Plans

IBR is available for Direct Loan and FFEL borrowers only, and has been on the books since  July 1, 2009.  As the newer and more favorable brother to the the Direct Loan income-contingent repayment plan, IBR isn’t as well-known.

The IBR plan offers a simpler formula for borrowers than did income-contingent repayments, and is available to both the FFEL and Direct Loan programs as opposed to solely Direct Loans.

How IBR Payments Are Calculated

In order to qualify for IBR, you must must have a “partial financial hardship.”  You’ve got a partial financial hardship id your annual federal student loan payments calculated under a ten-year standard repayment plan are greater than 15% of the difference between your adjusted gross income (and that of a spouse, if you’re married and file taxes jointly) and 150% of the poverty guideline for your family size and state.

Once it’s determined that you have a partial financial hardship, your monthly student loan payment under IBR is capped at 15% of adjusted gross income above 150% of the Department of Health and Human Services’ (HHS) poverty guideline.

Why IBR Is Awesome (Even If You’re Unemployed)

If you qualify for IBR, your payments will be lower than would otherwise be the case.  And if you’re unemployed, you still qualify for IBR – in fact, your payment would be $0 per month.  Why burn through a forbearance period when you can remain in active repayment for $0 per month?

There’s also this thing called “IBR forgiveness.”  Under this program, the government will forgive any remaining loan balances after borrowers repay through an IBR plan for a period not to exceed twenty-five years.  Stick with IBR for 25 years and the balance of your loans are forgiven.

The Downside Of Using IBR

Because IBR payments may be lower from time to time than the amount needed to pay off the loan, you may end a particular year owing more than you did at the start.  Even in a best-case scenario, using IBR payments will generally mean it takes longer to pay off your federal student loans.

Though you can select IBR if you’ve got FFELs ro Direct Loans, Federal parent PLUS and Perkins loans are not eligible. If you’re a Perkins loans borrowers you may still access the program if you have other loans and can consolidate with Direct loans.  I’ve heard of people going back to school for a single semester solely for the purpose of taking out a Direct Loan they could later use to consolidate with their Perkins Loan.

Applying For IBR

Applying for an income-based repayment plan for your Direct loans or FFELs can be cumbersome and confusing because every student loan servicer handles it a bit differently.  The paperwork requirements vary from servicer-to-servicer, and dealing with the proper people on the phone can be frustrating.  This says nothing of the annual recertification process, which requires that you justify and prove up your income for the previous year to determine the proper payment amount.

Thankfully, for those who qualify, income-based repayment can be a wonderful way to tame the federal student loan beast.

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