Is Income-Based Repayment the Best Option for My Students?
You’ve heard a lot about Income-Based Repayment, or IBR, but is it a one-size-fits-all solution for every student loan borrower? Below are some things to consider as you advise your current and former students on this repayment option.
IBR Has Benefits
Under current provisions, the benefits of IBR include a lowered monthly payment amount, currently capped at 15 percent of the borrower’s discretionary income, and forgiveness of any balance that remains after 25 years and 300 payments. If the borrower is eligible for Public Service Loan Forgiveness, that forgiveness may take place after just 10 years. Additionally, if the borrower’s IBR payment does not cover the interest accruing on any subsidized loans, the government will pay the remaining interest for up to three consecutive years from the date the borrower begins IBR.
IBR Also Has Drawbacks
IBR can be more expensive for the borrower in the long run. The lowered payments can cost the borrower more interest over the life of the loan, thoughundefinedin most casesundefinedthe increase in interest will be less than the late fees and collection costs of a defaulted loan. Also, if the borrower’s income rises to the point that they no longer qualify for the lowered IBR payment, their payment will return to the standard payment level, and the borrower will begin to make more progress toward paying down their balance.
Identify Borrowers Who Benefit Most from IBR
While IBR isn’t the right option for every borrower, it is a plan that may work well for those with lower earnings, relative to their debt, looking for an affordable payment based on their income and family size. It is also a good option for borrowers entering public service careers, as they could also take advantage of Public Service Loan Forgiveness, and receive loan forgiveness sooner.
Not Every Borrower is Eligible
To qualify for IBR, borrowers must demonstrate a partial financial hardship. This means that their annual student loan payment amount is more than 15 percent of the difference between adjusted gross income and 150 percent of the poverty line for their state and family size. If the calculated IBR payment is lower than the borrower’s payment under the 10-year standard repayment plan, they qualify.
Not Every Loan Type is Eligible
IBR-eligible loans include FFELP and Direct Stafford, Grad PLUS, and Federal Consolidation loans, as well as Perkins loans included in a FFELP or Direct consolidation loan. However, Parent PLUS loans, consolidation loans that include a Parent PLUS loan, private and alternative loans, and defaulted loans are not eligible.
IBR Forgiveness Amounts Will Be Taxed as Income
As the regulations stand now, the forgiveness amount will be taxed as income. There has been legislation proposed to change this, but it has not made progress in congress since its introduction.
Changes to IBR Are on the Way
New borrowers, on or after July 1, 2014, will be eligible for two new IBR provisions. First, their payment will be limited to only 10 percent of their discretionary income, rather than the current 15 percent. Secondly, they will be eligible for forgiveness after 20 years, instead of 25.
The IBR Application Must Be Completed Annually
Borrowers must apply for IBR every year in order to receive reduced payments, and the application can be tricky to complete correctly. Some tips to help ease the process:
- To offer proof of adjusted gross income, borrowers can submit a copy of their tax return or complete a 4506-T, or, if they are non-tax-filers, they may be required to submit other forms of documentation.
- When married borrowers who file their taxes jointly, both spouses’ income and federal loan debt will be considered in the eligibility calculation. If they file separately, only the applicant’s income and debt will be considered.
- The family size includes the borrower, his or her spouse, children, unborn children, and others who live with and receive greater than 50 percent of support from the borrower during a given year. The applicant must recertify this number each year, or it will default to a family size of one.
Understanding IBR is the key to making sure that this option is matched with the borrowers who can benefit most. IBR may not be the best option for every borrower, but for some it can be an ideal solution for making student loan payments more manageable in the long run.
Dave Bowman is a Regional Marketing Director with Great Lakes, serving schools in TASFAA. You can reach Dave at (888) 685-1604, or by e-mail at DBowman@glhec.org. Additional information about Great Lakes can be found online at www.mygreatlakes.org