Income based repayment (IBR) is getting a lot of buzz in veterinary school as it may be a more advantageous way of repaying student loans for some. Under the standard repayment plan, the monthly amount that you are expected to pay may be too much of a burden such that you are not able to make ends meet with what money you have left after paying your student loans. Most new graduates are not going to be financially set and will likely have to pay rent or a mortgage on a house, perhaps car payments, and many regular bills that add up (not to mention that most new graduates may be looking to start families at some point). Therefore, the idea behind IBR is to place a flexible cap on the amount of money that you are expected to repay per month, and that amount is based upon your previous year’s taxes.
For new graduates who didn’t earn a dime on their previous year’s taxes, they don’t have to repay anything at first. If you got a job immediately after graduating and your total income for that year will actually be approximately half of your total annual income because you only worked 6 months that year, then the following year’s IBR payments are based upon a much lower income. So here’s a visual:
As you can see from the table, the monthly payments are not very much when you compare them to the various standard repayment methods below.
After comparing the monthly payments, you may wonder why anyone would ever choose a standard repayment method, but clearly there’s a catch. If you noticed, the amount of debt that you have under the IBR plan actually increases over time as interest accrues, meaning that you are paying off less per year than you are accruing in interest, so ultimately you will end up more and more in debt over time. This may seem unnerving and make you feel helpless, however the current law (pre-2014) allows you to be forgiven of your loans after 25 years. So with IBR after 25 years you could easily have over $350,000 in loans that will be forgiven. The issue here is that the amount of loans remaining that is forgiven at that point is taxed as income. That means that if you were making $100,000 in 25 years, for that one year that your debt of $350,000 is forgiven your annual income is taxed at $450,000, which is easily over 100,000 dollars that you will pay in taxes. So, you will need to have saved up over those 25 years to accumulate enough money to pay your taxes down the line in order for this to work. In the end, may you end up paying less towards your loans? Perhaps. But that doesn’t mean IBR is appropriate for you. You should weigh your options before pursuing a particular loan repayment plan and be honest with yourself — if you are not the type of person to be able to diligently save for that big tax year 25 years down the line, then IBR is probably not the best choice for you.
The following is taken from studentaid.ed.gov and copied here for easier access and searchability.
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’ve initially qualified for IBR, you may continue to make payments under the plan even if you later no longer have a partial financial hardship. Find out whether you’re eligible.
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
Monthly Payments
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’ll 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.
Calculate your estimated loan payments under this plan!
Use the Income-Based Repayment Calculator (perhaps the most useful tool offered!)
Tools and Resources for IBR
Want more detailed information about IBR?
Want to Apply for IBR?
Contact your loan servicer before you apply for IBR. Your loan servicer will answer your questions about the IBR plan and help you to decide whether IBR is the right plan for your situation.
If you are ready to apply for IBR, go to StudentLoans.gov, sign in, and complete the electronic Income-Based (IBR)/Pay As You Earn/Income-Contingent (ICR) Repayment Plan Request.