Income-based repayment

**Income-based repayment** or **income-driven repayment** is a student loan repayment program in the US that regulates the amount that one needs to pay each month basing on one's current income and family size.

The phrase is an umbrella term for four specific repayment plans that are available within the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan Program. These four repayment plans are also named Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR).

## Mechanics

Payments under the IBR Plan are 10% or 15% of discretionary income, but will never be more than the 10-year standard repayment amount. Whether a borrower pays 10% or 15% of discretionary income depends on when the borrower first started borrowing student loans.

Payments under the PAYE Plan are 10% of discretionary income, but will never be more than the 10-year standard repayment amount.

Payments under the REPAYE Plan are also 10% of discretionary income; however, unlike IBR and PAYE, payments for high-income borrowers may be higher than the 10-year standard repayment amount. Also, unlike IBR and PAYE, if required monthly payments do not cover the accruing interest, 50% of the unpaid interest is forgiven, thereby reducing negative amortization.

Payments under the ICR Plan are the lesser of 20% of discretionary income or a 12-year standard repayment amount adjusted based on the borrower's income.

## Eligibility

Eligibility requirements for the income-driven repayment plans depends on which plan the borrower chooses and when the student borrowed.

The ICR Plan has the fewest eligibility requirements. A borrower is only required to have an eligible loan.

The IBR and Pay As You Earn Plans require that the borrower demonstrate a "need" to make income-driven payments and have eligible loans.

The Pay As You Earn Plan is limited to those who borrowed recently. Specifically, the borrower must be a "new borrower" as of October 1, 2007 and have received a disbursement of a Direct Loan on or after October 1, 2011. A borrower is a "new borrower" if, when receiving a federal student loan on or after October 1, 2007, the borrower did not have an outstanding balance on another federal student loan.

The Revised Pay As You Earn Plan is available to all Direct Loan borrowers regardless of when the money was borrowed. FFEL loans can be made eligible if they are consolidated into a Direct Consolidation Loan.

## Eligible loans

Eligible loans for the ICR Plan are all loans made under the William D. Ford Federal Direct Loan Program except Parent PLUS Loans. However, if a Parent PLUS Loan is consolidated into a Direct Consolidation Loan, then the Direct Consolidation Loan may be repaid under the ICR Plan.

Eligible loans for the IBR Plan are all loans made under the William D. Ford Federal Direct Loan Program and Federal Family Education Loan Program except for Parent PLUS Loans. Unlike ICR, Parent PLUS Loans cannot be consolidated into a consolidation loan in order to qualify.

Eligible loans for the PAYE Plan are all loans made under the William D. Ford Federal Direct Loan Program except for Parent PLUS Loans. Unlike ICR, Parent PLUS Loans cannot be consolidated into a consolidation loan in order to qualify.

Borrowers with Federal Family Education Loan (FFEL) Program loans and Federal Perkins Loan Program loans may become eligible for the ICR, Pay As You Earn, and Revised Pay As You Earn plans by consolidating them into a Direct Consolidation Loan.

## A "need" to make income-driven payments

The IBR and PAYE Plans require that borrowers demonstrate a "need" to make income-driven payments. This debt-to-income test checks to see whether the borrower would see a payment amount reduction under the IBR or PAYE Plan relative to the 10-year standard repayment plan.

## Different terms and conditions under the IBR Plan

The IBR Plan has different terms and conditions depending on when the student borrowed. If the borrower is a "new borrower" on or after July 1, 2014, then the borrower will have payments that are generally 10% of discretionary income and forgiveness is provided for after 20 years of qualifying payment. If a borrower is not a new borrower on or after July 1, 2014, then payments will generally be 15% of discretionary income and forgiveness is provided for after 25 years of qualifying repayment.

Similar to the definition of "new borrower" for Pay As You Earn, a new borrower for the IBR Plan is one who, when receiving a federal student loan on or after July 1, 2014, the borrower did not have an outstanding balance on another federal student loan.

## Determining eligibility

Utilizing the repayment estimator online, a borrower can estimate his other monthly payments under all repayment plans, including IBR. However, the repayment estimator can only estimate eligibility. To receive an official determination of eligibility, a borrower must contact his or her loan servicer. The National Student Loan Data System (Nslds.ed.gov) can let a borrower know who is the servicer of his/her loan.

## Public Service Loan Forgiveness Program

The Public Service Loan Forgiveness Program provides for the forgiveness of certain types of federal student loans after 10 years of qualifying employment and payments. The IBR plan is one of the qualifying repayment plans for the Public Service Loan Forgiveness Program. And, to receive Public Service Loan Forgiveness, borrower must have repaid their loans under one of the "income-driven repayment plans", including IBR.

## Applying for an income-driven repayment plan

To apply for an income-driven repayment plan, the borrower needs to submit the Income-Driven Repayment Plan Request and provide information about family size and income. Income can take the form of tax information (adjusted gross income), or "alternative documentation of income", such as a pay stub.

Tax information, as well as the application, itself, and certification of family size, may be provided electronically through StudentLoans.gov. If completing the application electronically, a borrower may transfer tax information into the application directly from the Internal Revenue Service (IRS).

According to the application, borrowers may also self-certify that they currently have no income, thus avoiding needing to try and document that they have no income.

Because the eligibility criteria are complex, the application allows borrowers to indicate that they want their loan servicer to determine which of the income-driven plans the borrower is eligible for, and to place the borrower on the income-driven plan with the lowest monthly payment amount.

## Which plan to choose

Most borrowers seeking an income-driven plan should choose Revised Pay As You Earn. The REPAYE plan provides benefits that the IBR, ICR, and PAYE plans do not, including a 50% interest subsidy if the required payment does not cover the accruing interest. However, there could be disadvantages to choosing the REPAYE plan which could result in higher amounts being paid over the life of the loan or very high monthly payments for borrowers with high incomes.

## Recent announcements

On June 9, 2014, President Obama announced that the Department of Education would modify the PAYE Plan so that it is available to all borrowers, regardless of when they borrowed. The new repayment plan, Revised Pay As You Earn, launched on December 17, 2015.

The U.S. Department of Education Office of Inspector General recently calculated that the portion of total Direct Loan volume being repaid through IDR plans has increased 625 percent from the FY 2011 loan cohort ($7.1 billion) to the FY 2015 loan cohort ($51.5 billion). For IDR plans, the Federal government is expected to lend more money than borrowers repay. From the FY 2011 through FY 2015 loan cohorts, the total positive subsidy cost (net cash outflow) for student loans being repaid through IDR plans has increased 748 percent (from $1.4 billion to $11.5 billion)