Wrong selection of loan repayment plan not only inhibits you from making timely loan repayment, it may also get you in the cycle of debt and affect your ability to have a secure financial future. To help fresh graduates and young professionals pay back their loan debt, the US Government has offered several loan repayment plans to the borrowers. These include:
- Standard repayment plan
- Pay-as-you-earn repayment plan
- Income-driven repayment plan
- Income-based repayment plan
- Graduated repayment plan
- Extended repayment plan
Income-Based Repayment Plan (IBR)
Income-based repayment plan is one of the types of income-driven repayment plans. This repayment plan takes the borrower’s monthly income and family size into account and caps the monthly payments to an amount that’s affordable to the borrower. In addition to this, the outstanding balance after 25 years of qualifying monthly payments can also be forgiven under this repayment plan.
What Types of Loans are Eligible for Income-Based Repayment Plan?
The following loans can be paid back using the income-based repayment plan:
- All direct loans, subsidized and unsubsidized
- All FFEL loans, subsidized and unsubsidized
- Direct and FFEL PLUS loans taken out by students
- Direct and FFEL consolidation loans taken out by parents (must not include any PLUS loans)
- Consolidated Federal Perkins loans
In addition to this, the income-based repayment plan is offered only to those borrowers who are facing a partial financial hardship. The definition of partial financial hardship is satisfied if the outstanding balance on loan is greater than 15% of the difference of borrower’s adjusted gross income and 150% of the poverty line. Poverty line is determined on the basis of borrower’s state of residency and their family size.
How does the Repayment Work?
In income-based repayment plan, the borrower can repay the loan in small monthly payments. The amount of payment is determined by the borrower’s monthly income and their family size, and is capped to 15 percent of their discretionary income. For borrowers who took out a Direct loan on or after July 1st, 2014 and who have no outstanding balance on FFEL or Direct Loan, they can pay back the loan in monthly payments capped at 10 percent of their discretionary income.
Monthly payments can be adjusted every year, and any remaining balance is forgiven after 25 years of qualified monthly payments.
What are the Benefits of Income-Based Repayment Plan?
This repayment plan is best suited for students who have a high debt-to-income ratio and who can’t pay back the loan using standard repayment plan. Also, if borrower’s gross income is less than 150 percent of the poverty line, under the income-based repayment plan, the monthly installments will be $0.
In addition to this, working at a low-salaried job and having a large family also helps in qualifying for income-based repayment plan.