Income Based Repayment Plan

Aware that the bulk of my student loans are due in 2 months, I finally sat down yesterday and took a hard look at all of them. I made a chart listing each loan provider, loan number, with monthly payments, interest rates, due dates, repayment plans and current principal balances.

I then totaled all of my monthly payments. On the standard repayment plan, I would have owed, come December 1st, over $2000 per month (!!!). I knew it was going to be a lot, but not THAT much. So I looked into ways to reduce my monthly fee.

I found out that back in July '09, President Obama introduced something called the income based repayment plan. According to Federal Student Aid, "Income Based Repayment (IBR) is one of several repayment plan options for borrowers of student loans made under the William D. Ford Federal Direct Loan (Direct Loan) Program or the Federal Family Education Loan (FFELSM) Program. If you qualify for IBR, your required monthly payment will be capped at an amount that is intended to be affordable based on your income and family size, and will be less than what you would have to pay under a 10-year Standard Repayment Plan."

In order to sign up for IBR, you have to have a "partial financial hardship." You satisfy the requirement if the amount you would have to pay under a standard repayment plan is higher than the amount you would pay under IBR. They determine the monthly amount you pay under IBR by (1) subtracting 150 percent of the poverty guideline (view it here) from your adjusted gross income, (2) taking 15% of that difference, and (3) dividing the resulting number by 12.

Doing the math for myself, 150% of the poverty guideline for a family of 1 would be $16,245. If my AGI was $50,000, the difference would be $33,755. 15% of that would be $5063. Divided by 12, the monthly payment would be about $421. A long way off from $2000!

It doesn't apply to private loans, so I have 1 loan that's exempt. But I'm applying for an unemployment deferment (it's a loan from undergrad, and has already been in repayment for a couple months). Something else interesting is after 25 years of repayment under IBR your remaining loan balances are canceled (but unfortunately charged to you as taxable income).

I found all the necessary forms on Sallie Mae's website. It's recommended that you send in your paperwork at least 2 months before the end of your grace period (I sent it out just in time!). Here's some more info about how to sign up. And here's a detailed Q&A from the Department of Education.

Is anyone else considering (or signed up for) IBR?


Jessica said...

As a person on IBR two thoughts:

1. If you work in government or public interest those loans are forgiven after ten years and it is not taxable income. This is the track I am on as an attorney working for a government agency.

2. Keep in mind that in IBR your loan balances will skyrocket as you won't be paying all of even the interest owed each month. So, if it truly is taxable income on the 25 year forgiveness you'll be taxed on an amount much higher than your current loan balance. Be sure to keep saving so that you can afford a tax bill of tens of thousands of dollars.

Sunflowers said...

I heard about the 10 year forgiveness program. The government or public interest path would be great, but there aren't many jobs in the sector available in my area and they're very competitive. But here's to hoping ;)

Yes, it is taxable income after 25 years. And I hope that well, well before that I'll be making 6 figures and it won't be a problem. But I will be saving up, either way.

Thanks for your comment!

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