New Income-Based Repayment option for federal student loan holders will help those with overbearing payments
Student loan holders having difficulty making their loan payments have a new option for repayment as of July 1st. That is when income-based repayment became available for holders of many types of federal student loans.
What is it?
Income-based repayment (IBR) is a new repayment program for holders of many federal student loans as of July 1st.
How does it work?
If you hold eligible federal student loans or consolidation loans, and your loan payments are high relative to your income, under this new schedule your lender would have to apply a payment based on your circumstances, rather than based on amortizing the loan over a certain time period.
The IBR looks at your family size, state of residence, and income level to determine a monthly payment amount. If your payments under IBR are less than they would be under a 10 year repayment, then you can choose to make payments under the IBR schedule.
What are the benefits?
Lower payments – Families struggling with making their loan payments may benefit by lowering the payments. While payments will be based on income, they can not rise to more than would be paid under the standard 10 year repayment plan.
Deferred interest – For subsidized Stafford loan holders, if the IBR schedule does not cover the full amount of interest being accrued, the first three years that interest will be paid by the federal government.
Loan cancellation – If after making payments on an IBR schedule for 25 years (or 10 years if a public service employee), there is still an outstanding loan balance, the loans may be eligible for cancellation. There are several requirements for this that you should familiarize yourself with now if you believe you may need to use this in the future.
What are the disadvantages?
Reporting – Every year you must report your income level for possible change in payment amount.
Potential for paying more – Since your payment is lower and it may not be covering the accrued interest, you could pay more in interest over the life of the loans.
Cancelled loans – Currently loans that are forgiven under IBR are considered taxable income (though pending legislation may change this).
IBR repayments will benefit those that want to repay their student loan debt, but currently cannot meet monthly payments. Other options to consider if experiencing trouble meeting your student loan payments are graduated and extended payment plans, and deferral and forbearance options for financial hardship.
To see if you are eligible for IBR repayment, or to discuss other options to consider on your student loan payments, contact your student loan lender.