Pros and Cons of Income-Based Repayment (IBR)

This article was written in 2012. Verify current rules and regulations here.

money in a hand with a clock ticking nearby

If you’re in debt with student loans, you might be excited to learn about income-based repayment (IBR), which was set in place by the Obama administration. IBR allows borrowers to pay back their loans based on their income, which could make monthly student loan payments more manageable.

This is good news for some debtors, but it doesn’t mean you should go borrowing thousands of dollars for grad school without worry. The IBR has all kinds of rules and requirements. Below are a few pros and cons. As always, check with your financial aid officer and your lender.

IBR Pros

1. Lower Monthly Payments

Having a lower monthly payment is the thing that attracts most debtors to IBR. There’s a special formula that determines your monthly payment. It takes into account your adjusted gross income level, the Federal poverty line, and how many family members you support.

2. Student Loan Forgiveness

If you qualify, it’s possible that whatever unpaid balance you still have after 25 years of steady payments gets forgiven by the Department of Education. This feature is usually reserved for people who have worked full-time in public service.

3. Student Loan Interest Help

For your first three years in the IBR program, the government might pay the interest on your subsidized Stafford loan. After that, unpaid interest adds up, and it might be compound interest. Ask about it.

IBR Cons

1. Increased Interest Over the Life of the Loan

Paying your loan slowly means that your interest will increase more than if you paid your debt back quickly. With IBR, your loan grows every month—possibly faster than you’re paying it off. That extends the amount of time it takes to completely pay off your debt. While lower monthly payments are attractive, the IBR program could actually end up costing you more money in the long run.

2. Annual Paperwork

To qualify for IBR, debtors have to verify their income every year. That can be a tedious and potentially invasive process.

3. Upward Adjustments

Payments are adjusted upward each year (to match rising income). That means it’s possible that people with fluctuating annual income might have a really good year and get locked into a higher payment for the following year even if their income decreases.

4. IBR Doesn’t Include Private Loans

Federal loan relief programs like IBR (also known as income-driven repayment) can only be used on federal loans such as Perkins, Stafford, and Grad PLUS. Private loans have their own rules.

5. You and Your Spouse’s Income is Factored

It’s the family income that determines your payments. That means if you are working for a non-profit and earning $25k per year, but your spouse is making $75k, your repayment is based on a $100k per year income.

6. You Might Have to Pay Taxes

As of 2012, the amount you’re forgiven under IBR counts as income for which you can be taxed in the 25th year you’re in the program. For example: you borrowed $50k for school, and paid off $20k over 25 years. The forgiven $30k counts as income, and you’ll owe taxes on it.

7. Once You’re In, You’re In

If you stay in the program then your payments will never go above the standard ten-year payment amount. That’s great if you love your job, but if you leave the IBR program for a new job, then you may be penalized.