Income Based Repayment: An Overview


Income Based Repayment (IBR for short) is one of the most underutilized tools available to recent grads overwhelmed with student loan payments. Navigating the confusing world of repayment options coupled with unhelpful customer service reps often prevents borrowers from choosing the plan that is right for them.

No matter how overwhelming the process may be, it’s worth taking the time to find out if IBR is right for you. Depending on your situation, you might be able to save yourself thousands of dollars (or at least reduce your current financial stress).

Log into the National Student Loan Data System and keep reading to figure out what makes the most sense for you.

How Income Based Repayment Works

Income Based Repayment is designed specifically to help borrowers who have federal student loans that exceed their annual income. Keyword being federal loans. Private student loans are another story. (Although there is hope for borrowers overwhelmed by private loans as well–scroll down to the bottom of this article if you need help with private loans.)

Income Based Repayment caps your monthly payment at an amount that is (in theory) affordable based on your income. Whether or not you can afford your payments under IBR may be debatable, but the reality is the payments will be less than if you were on a standard 10-year repayment plan.

The Difference Between IBR and Other Repayment Plans

If you can’t afford the standard repayment plan (and many people can’t), you have a few different options. Monthly loan payment amounts may be similar between Income Based Repayment, Income Contingent Repayment, Extended Repayment and Graduated Repayment. But don’t let that fool you. Which one you choose could greatly impact the total amount of money you repay on your loans.

If you need to choose a plan other than the Standard Repayment plan and you qualify for IBR, chances are it’s the best option for you. Generally speaking, Extended and Graduated Repayment plans should be used as a last resort. They offer very little in the way of benefits besides lower monthly payments. And ultimately you’ll have to pay off the full balance of your loan. Taking longer to do so means you’ll pay more in interest overtime…potentially a lot more. With IBR, after 25 years of on-time payments your remaining loan balance will be forgiven. For some people, that kind of benefit might just be a life saver.

As far as Income Contingent Repayment goes, I have yet to meet a client who this plan was right for. In my experience so far, 100% of the time this repayment option is the easiest to eliminate. In fact, if you are on ICR and it’s working for you, I’d love to hear about it. Leave a comment below or send me an email.

Pay As You Earn Repayment Plan

Pay As You Earn is essentially the new and improved version of IBR available to students who started borrowing in October of 2007 or later. If you took out any loans before then, unfortunately you won’t qualify for this new initiative.

The easiest way to understand Pay As You Earn is that it’s like IBR, but better. Payments will be capped at 10% of your discretionary income (rather than 15%) and after 20 years your remaining balance will be forgiven (rather than 25 under IBR). For example, a borrower with $100,000 in student loan debt and an annual income of $60,000 would pay $541 under IBR, but only $360 under PAYER.

New graduates who have more federal loans than their annual income should absolutely apply for Pay As You Earn. Just make sure not to rub it in the face of your older siblings or friends who aren’t lucky enough to qualify.

How To Decide if IBR is Right for You

Student loan debt can be stressful. I often have clients who feel pressure to pay their loans off as quickly as possible. However, it’s important to take a deep breath and think through your overall financial health. Keep in mind that when it comes to retirement there are no loans available. In other words, if your student loan payments are preventing you from saving for retirement then you may be setting yourself up for a much more stressful financial situation in the future.

Many factors go into deciding whether or not IBR is right for you. If you work in public service (which includes doctors, nurses and other high paying/high student debt fields) you can benefit from a program called Public Service Loan Forgiveness. Those that qualify should absolutely consolidate their federal loans and sign up for IBR–the sooner the better.

If you don’t work in public service but have student loans that far exceed your current annual income with little hope of higher earning potential, then IBR is probably right for you as well. An example would be someone with $80,000 or more in student loan debt who works in a creative field and only makes $45,000 a year. Switching your payments to IBR can free up a lot of extra cash that you can put towards retirement, an emergency fund and other financial goals. It’s really a no-brainer.

What About Private Loans?

If most of your student loans are private, unfortunately IBR isn’t going to help much. But don’t give up all hope. You can still call your lender and figure out a payment plan that is realistic. Remember, you are in control. You may owe the money, but you aren’t a magician. If you don’t have the income to make your payments, then it’s time to go to plan B, whatever that may be. Don’t let lenders bully you or make you feel guilty. You’re doing the best you can. And at the end of the day, it’s your life–not theirs. You have to make sure you can afford to eat dinner and pay rent. Both now and when you retire.

The Bottom Line


Resigning yourself to the fact that you might just have to make student loan payments for 25 years could feel like a life sentence. But the reality is, life is expensive. Most people have lots of goals–buying a home, having a family, retiring, traveling–and limited income. Managing your money is about making choices to maximize the resources you do have. Feeling stressed or worrying isn’t going to suddenly make you a millionaire.

The best thing you can do is take a step back and look at your current situation and your future goals and make decisions accordingly. Remove the emotion, and channel any negative energy you may have into working hard and enjoying what you do have. Reevaluate your situation every 1-2 years (or whenever you have a big life change) to make sure you are still on the right track. But in between, try to stop worrying and get back to the business of living your life.