What are These New Programs? - Income-Based Repayment and Public Service Loan Forgiveness
Income-Based Repayment (IBR) is a new payment option for federal student loans. Starting July 2009, it will help borrowers keep their loan payments affordable with payment caps based on their income and family size. For most eligible borrowers, IBR loan payments will be less than 10 percent of their income - and even smaller for borrowers with low earnings. IBR will also forgive remaining debt, if any, after 25 years of qualifying payments.
Who can use IBR? IBR is available to federal student loan borrowers in both the Direct and Guaranteed (or FFEL) loan programs, and covers most types of federal loans made to students, but not those made to parents (click here for more about qualifying loans). To enter IBR, you have to have enough debt relative to your income to qualify for a reduced payment. That means it would take more than 15 percent of whatever you earn above 150% of poverty level to pay off your loans on a standard 10-year payment plan. Use our calculator to see if you're likely to be eligible.
How does IBR make payments more affordable? IBR uses a kind of sliding scale to determine how much you can afford to pay on your federal loans. If you earn below 150% of the poverty level for your family size, your required loan payment will be $0. If you earn more, your loan payment will be capped at 15 percent of whatever you earn above that amount. Except for the highest earners, that usually works out to less than 10 percent of your total income.
This chart shows examples of IBR payment caps as a percentage of the borrower's family income, based on various incomes and family sizes.
|Number of Persons in Household|
|6||No Payment Required||No Payment Required||4.4 %||8.6 %|
|4||No Payment Required||3.1 %||7.1 %||10.0 %|
|2||No Payment Required||7.1 %||9.8 %||11.9 %|
|1||3.3 %||9.2 %||11.1 %||12.7 %|
|2008 Family Income|
What about interest? In some situations, your reduced payment under IBR may not cover the interest on your loans. If so, the government will pay that interest on your Subsidized Stafford Loans for your first three years in IBR. After three years and for other loan types, the interest will be added to the total amount you owe. While your debt may grow if your affordable payments are low enough, anything you still owe after 25 years of qualifying payments will be forgiven.
What are qualifying payments? The Department of Education has indicated that the following types of payments will count towards IBR's 25-year forgiveness period, as long as you are in IBR at some point during those 25 years.
- Payments made in the Income Contingent Repayment plan (ICR) before July 1, 2009.
- All payments made on or after July 1, 2009 in the IBR, Income Contingent Repayment (ICR), and Standard (10-year) Repayment plans.
- Periods when the borrower has a calculated payment of zero in IBR or ICR (this occurs when your income is at or below 150% of the poverty level for your family size).
- Periods on or after July 1, 2009, when the borrower has been granted an economic hardship deferment.
Reprinted with the permission of The Institute for College Access & Success.
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