Income-based repayment (“IBR”) is a relatively new option available for federal student loan borrowers, and it can save you literally thousands of dollars. Unfortunately, many people who are still paying off their student loans don’t know about this program. Even if you are currently on a different repayment plan, you may be able to switch.
IBR is exactly what it sounds like it is: repayment plan that is based on your income; specifically, your adjusted gross income (AGI). The Department of Education uses a formula to calculate your monthly payment that takes into account your AGI, your family size, and your total federal student debt, and comes up with an payment amount for you that is generally between 10-15% of your monthly income, even if you have a large loan balance.
Let me say that once more: under IBR, you pay a small percentage of your monthly income, even if you have a large loan balance.
To illustrate, let’s say you have $100,000 in federal student loans. For the sake of argument, let’s say that this is in a single federal consolidation loan with a 6.8% interest rate (fairly standard). Under the standard repayment plan, your monthly payment would be: $1,150.80 each month.
That’s a lot.
In contrast, under IBR, your payment would be tied to your AGI. Let’s assume the same situation: a federal consolidation loan of $100,000, 6.8% interest rate. Depending on your family size, your monthly payments would be somewhere around:
Your AGI Your Payment
You don’t need to be a math whiz to realize that there is a big difference between $1,150 and the figures under IBR. Even under other federal repayment plans, such as the graduated or extended repayment plans, IBR will often yield a lower figure.
Too good to be true? It gets better. Stay tuned for my post on federal loan forgiveness.