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Income Based Repayment (IBR) is one of the most beneficial programs for federal student loan borrowers. The basic premise is that no matter how much you owe in federal student loans, your monthly payment will be calculated based on a small percentage of your annual adjusted gross income. After 25 years of payments, whatever balance remains will be forgiven by the federal government. If you work in public service, that repayment period can be dropped to only 10 years under the Public Service Loan Forgiveness Program.
Recently, the Obama administration announced a new student loan initiative that purported to change IBR in a real, concrete, beneficial way. Unfortunately, these changes do not apply to everyone, and there’s been a lot of confusion out there about what the benefits are, and who is eligible to receive them. Let me try to clarify things.
Old-School IBR. Under the current IBR plan (which is still a fairly new program, so I have mixed feelings about calling it “old school”), payments are capped at 15% of your discretionary income, and any remaining balance is forgiven after 25 years of payments (10 years if you work in public service). Anyone who has federal Direct or FFEL loans can qualify for IBR (but only Direct loans can be forgiven for working in public service).
New-School IBR. The original legislation that created IBR provided for an IBR “improvement” in 2014. That improvement would lower the payment cap to 10% of annual adjusted gross income, and reduce the repayment period to only 20 years of payments (the 10-year public service loan forgiveness program remains the same). What the Obama administration did this year was to bump up the IBR improvement date so that it takes effect in 2012, instead of 2014.
The Catch. There’s always a catch, isn’t there? Unfortunately, not everyone is going to be eligible for the New-School IBR; in fact, most people aren’t. In order to be eligible, students must have first borrowed federal student loans in 2008 or later, and also must borrow a federal student loan in 2012. This effectively cuts out from eligibility most graduates prior to the class of 2012.
The Tiny Silver Lining. The regulations governing New-School IBR have not yet been written, so nothing is necessarily set in stone. But all indications (so far) say that New-School IBR will generally not benefit people who are already out of school and in repayment.