What You Need to Know About Income-Based Repayment Plans

What is Income-Based Repayment Plans?

Income-based repayment plans cap borrowers' monthly payments according to their income and forgives all debt after years of consecutive payments.

There are four income-based repayment plans that vary slightly.

  • The Income-Based Repayment (IBR) Program allows borrowers to cap their monthly payments at 15% of their discretionary income, which the Department of Education reports as 150% of the current poverty line.  Borrowers can qualify for loan forgiveness after they have made consecutive payments for 25 years. 
  • The Income-Contingent Plan uses a different formula to calculate monthly payments, but caps the monthly payments at a maximum of 20 percent of discretionary income with forgiveness available after 25 years of payments.
  • The Pay As You Earn Program caps payments at 10 percent of discretionary income, and offers loan forgiveness after 20 years. This program only applies to borrowers who took out their first loan on or after Oct. 1, 2007, and received a loan disbursement on or after Oct. 1, 2011.
  • An Income-Sensitive Repayment Program is for certain low-income borrowers, with payment caps as low as 4 percent of gross monthly income. Loan forgiveness is not available with this program.

Income-Based Repayment Plans could end up costing you more money in the end.

  • The longer it takes you to repay your debt, the more you pay.
  • Interest accrues fast. A graduate with $30,000 in loans at a 6.8 percent interest rate will add more than $2,000 to the cost of the loan if he/she does not pay interest for one year.
  • Loan forgiveness comes with strings attached.
  • Even if the government forgives all or part of your loan, you still have to pay taxes on the amount of loan that was forgiven, unless you qualify for public service loan forgiveness (for certain professions such as nursing or public defense).
  • Most people who are in repayment programs do not have a loan balance left to forgive after making reduced payments for that many years.  
  • Income-based repayment plans are not the best way to reduce a loan balance, but they can be beneficial for avoiding default and bad standing on a loan.