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More than 70 percent of students who graduate from college begin their life in the real world encumbered with debt. The average amount owed on student loans by those who graduated in 2013 was nearly $30,000. Ten percent of graduates owed more than $40,000 in student loans. These figures do not include additional debt accumulated through loans from relatives or private lenders or maxed out credit cards.
For student loans backed by the federal government, there are several types of repayment plans, depending on the type of loan. One helpful plan is referred to as Income Contingent Repayment plan (ICR) which has some similarities with an Income-based Repayment plan (IBR). The two should not be confused and the IBR offers the greatest benefit to a financially strapped student loan holder.
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Benefits of IBR
In June 2012, a Presidential Memorandum was released establishing criteria for those who qualify for IBR payment plans. The required monthly payment will not be more than 10 percent of the borrower’s income. This is significant in that, under the standard 10-year repayment plan, a graduate that has $60,000 in student loans would be required to make monthly payments of $690 with no consideration of income.
Making that hefty of a payment for the borrower may be impossible if the person is making $45,000 annually. Before ICR or IBR plans were available, the borrower either had to pay the $690 or default on the loan which resulted in going deeper and deeper in debt as interest accrued and collection actions commenced. Some forbearances and deferments were available, but there was still little hope of ever repaying an enormous debt that kept on growing.
The amount required for payment under the IBR plan is based on family size and a person’s Adjusted Gross Income (AGI). Using the above example, the benefit to the borrower would be:
- Instead of $690 a month, the $45,000 wage earner would have the monthly payments reduced to $239.
- Although the payment may not cover the interest, depending on the loan, some of the interest may be forgiven.
- If payments are made according to the agreement and certain other criteria are met, any balance remaining after 20 years will be forgiven.
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Things to Consider
With lower payments, it will take longer to pay off the debt. The longer it takes to pay the debt, the more interest accrues. With the additional interest, the amount required to pay off the loan will be greater than the amount under the traditional 10-year plan.
- All those who obtained federal loans under the William D. Ford Federal Direct Loan (Direct Loan) or under the Federal Family Education Loan (FFEL) programs are eligible.
- PLUS loans made to parents are not eligible.
- Non-federal loans are not eligible.
- The loan must not be in default.
- Demonstrate a partial financial hardship that makes it impossible for the borrower to make the required payment under the standard 10-year repayment plan.
- A partial financial hardship is based on a mathematical calculation that compares the income of the borrowers with the poverty guideline of their state for a family of their size.
- It is possible for two wage earners who jointly file their income tax returns and both have student loan debt to both benefit from the IBR plan.
- Applicants must submit their income tax returns verifying their income and family size.
Applications may be made online at the U.S. Department of Education’s website.
- Income Based Repayment Program Q & A http://studentaid.ed.gov/sites/default/files/income-based-repayment-common-questions.pdf
- How The $1.2 Trillion College Debt Crisis Is Crippling Students, Parents And The Economy http://www.forbes.com/sites/specialfeatures/2013/08/07/how-the-college-debt-is-crippling-students-parents-and-the-economy/
- Project on Student Debt State by State Data http://projectonstudentdebt.org/state_by_state-data.php
- Presidential Memorandum--Improving Repayment Options for Federal Student Loan Borrowers http://www.whitehouse.gov/the-press-office/2012/06/07/presidential-memorandum-improving-repayment-options-federal-student-loan
- Repay Student Loans Based on your Income: http://www.usnews.com/education/blogs/student-loan-ranger/2011/03/16/repay-student-loans-based-on-your-income