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Reducing Federal Loan Monthly Payments

By Edited Nov 13, 2013 1 0

Income-Based Repayment Plan to Reduce Federal Student Loan Monthly Payments

The average graduate that received college loans receives their degree with a debt of $26,300.  With 50% of all college graduates unemployed or underemployed, repaying that debt weighs heavy on graduates just entering or still trying to enter the working world.  A program designed to reduce the financial pressures of federal student loan payments is the Income-Based Repayment Plan (IBR) program provided by the US government. 

IBR allows low-income students to reduce the amount of monthly loan payments.  The IBR monthly repayment amount is based on the borrower’s income and family size.  The size of the actual loan does not affect the monthly repayment.  The program is designed to make monthly repayment amounts affordable by placing a ceiling on the monthly repayment at 15% of the borrower’s discretionary income.  Discretionary income is defined as the difference of the borrower’s adjusted gross income and 150% of the applicable federal poverty line (poverty line is determined by family size and the state of residence).  Starting in 2014, the IBR monthly repayment ceiling will be 10% of the borrower’s discretionary income.

The IBR program became active in 2009.  The awareness and ease of applying is being improved so the public can take full advantage of the IBR program.  IBR program enhancements were directly addressed by the President of the United States.

Obama federal student loan
  President Obama issued a memorandum on June 7, 2012, to the Secretaries of Education and Treasury instructing them to streamline the application process, develop resources for informing the public about the IBR program, and implementing an outreach program to students before graduation.  

BENEFITS OF INCOME-BASED REPAYMENT PLAN PROGRAM

The IBR program is designed to provide the borrower a lower monthly payment than standard 10-year repayment plans. 

The monthly payment amounts are adjusted annually based on your income. 

The program will pay the interest of Subsidized Stafford loans for three consecutive years if the reduced monthly payment does not cover the interest.  After the 3 year period, the interest will be added to the total amount of the loan.  This could seem like a long-term problem except the program has a 25-year forgiveness period.

After 25 years of payment, the loan is forgiven.  Too long?  If you are employed in a public service job or employed by an employer that provides particular public services you may qualify for the Public Service Loan Forgiveness (PLSF) program that forgives federal student loans after 10 years of qualifying payments. 

IBR payments are qualifying payments under the PLSF program.

ELIGIBILITY REQUIREMENTS

Eligibility for the IBR program is based on three factors; monthly repayment amount is high relative to your income and family size, type of student loan received and you must meet the ‘partial financial hardship’ requirement.

A high monthly repayment amount is determined to be any amount greater than 15% of the borrower’s discretionary income or any amount greater than 15% of the borrower’s adjusted gross income (AGI) minus 150% of the applicable federal poverty line.  If the borrower’s AGI is less than 150% of the applicable federal poverty line, the monthly repayment amount is $0.     

Type of loans eligible for the IBR program include loans provided by the William D. Ford Federal Direct Loan Program (Direct Loans) or Federal Family Education Loan Program (FFELP) that are not in default and provided directly to students.  Any loans made to parents of students are not eligible. 

Partial financial hardship has a simple definition.  If the monthly repayment amount of your current qualifying loan is higher than the monthly repayment amount you would be required to pay under the IBR program, you are considered to have a partial financial hardship.

BENEFITS OF INCOME-BASED REPAYMENT PLAN

The program is designed to provide the borrower a lower monthly payment than standard 10-year repayment plans. 

The monthly payment amounts are adjusted annually based on your income.

Higher education stamp
 

The program will pay the interest of Subsidized Stafford loans for three consecutive years if the reduced monthly payment does not cover the interest.  After the 3 year period, the interest will be added to the total amount of the loan.  This could seem like a long-term problem except the program has a 25 year forgiveness period.

After 25 years of payment, the loan is forgiven.  Too long?  If you are employed in a public service job or employed by an employer that provides particular public services you may qualify for the Public Service Loan Forgiveness (PLSF) program that forgives federal student loans after 10 years of qualifying payments. 

IBR payments are qualifying payments for the PLSF program.

DO YOU HAVE A QUALIFYING LOAN AND ARE STILL WONDERING IF YOU ARE ELIGIBLE FOR THE PROGRAM? 

Take your expected or current monthly repayment amount and compare that to the applicable monthly payment to the chart below.

The U.S. Department of Education provides the following chart for estimated monthly payments:

 

IBR Monthly Payment Amounts

 
     

Family Size

   
   

1

2

3

4

5

6

7

Annual Income

$10,000

$0

$0

$0

$0

$0

$0

$0

$15,000

$0

$0

$0

$0

$0

$0

$0

$20,000

$41

$0

$0

$0

$0

$0

$0

$25,000

$103

$29

$0

$0

$0

$0

$0

$30,000

$166

$91

$17

$0

$0

$0

$0

$35,000

$228

$154

$80

$5

$0

$0

$0

$40,000

$291

$216

$142

$68

$0

$0

$0

$45,000

$353

$279

$205

$130

$56

$0

$0

$50,000

$416

$341

$267

$193

$119

$44

$0

$55,000

$478

$404

$330

$255

$181

$107

$33

$60,000

$541

$466

$392

$318

$244

$169

$95

$65,000

$603

$529

$455

$380

$306

$232

$158

$70,000

$666

$591

$517

$443

$369

$294

$220

 

An online IBR calculator is available to obtain an estimated monthly repayment plan based on your specific income.  To obtain the official number and to ensure you are eligible, you must directly contact your loan servicer.

HOW TO APPLY?

Applying for the IBR program must be done through your lender.  Determining who your lender is can be looked up at the National Student Loan Data System

STATISTICS FOR THE NORMAL AMERICAN HOUSE

The US Census Bureau reports the median income of US households as $49,445 for 2010 while the median household size was roughly 3 persons in 2010.  This equates to the average US household qualifying for the IBR program with a reduced federal loan repayment amount of ~$260 for repayment of a federal loan of at least $23,000 (based on a 6.8% interest rate).  With the rising cost of higher education and the monthly loan repayment amounts to be further reduced in 2014, the IBR program is a great program for working parents, as well as, any low-income earners wanting to obtain a higher education and reduce their loan repayments.

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Bibliography

  1. "Income-Based Repayment Plan." Student Aid on the Web. 23/June/2012 <Web >
  2. President Barack Obama Presidential Memorandum--Improving Repayment Options for Federal Student Loan Borrowers. Washington D.C., Presidential Memorandum: The White House, 2012.
  3. Income, Poverty, and Health Insurance Coverage in the United States: 2010. Washington, DC, Current Population Reports: U.S. Census Bureau, 2011.
  4. "America’s Families and Living Arrangements: 2010." United States Census Bureau. 25/June/2012 <Web >

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