If your student loan bills are higher than you can comfortably afford, you are not alone. The federal government offers several income-driven repayment (IDR) plans to help, and Income-Based Repayment (IBR) is one of the foundational plans that connects your monthly payment to your earnings.
How Are IBR Payments Calculated?
The IBR formula is designed to make payments manageable by basing them on your discretionary income, not your total loan balance.
Here’s how it works:
- Determine discretionary income: The government calculates your discretionary income by taking your Adjusted Gross Income (AGI) and subtracting 150% of the federal poverty guideline for your family size and state.
- Calculate the payment: Your monthly payment is set at either 10% or 15% of your discretionary income, depending on when you first took out your loans.
- 15% for borrowers who took out their first federal loan before July 1, 2014. The repayment term is 25 years.
- 10% for new borrowers who took out their first federal loan on or after July 1, 2014. The repayment term is 20 years.
Crucially, your IBR payment will never be more than what you would have paid on the 10-Year Standard Repayment Plan. To remain on the plan, you must recertify your income and family size each year.
IBR Payment Example
Let’s look at an example for a borrower named Alex living in Illinois.
- Adjusted Gross Income (AGI): $55,000
- Family Size: 1
- Loan Status: New borrower (loans taken out after 2014)
- Calculate Discretionary Income: Using the 2024 federal poverty guideline for a single person ($15,060), we first find 150% of that amount ($15,060 x 1.5 = $22,590). Then, we subtract it from Alex’s AGI: $55,000 – $22,590 = $32,410 in discretionary income.
- Calculate the IBR Payment: As a new borrower, Alex’s payment is 10% of discretionary income. This comes to $3,241 per year, making the monthly payment approximately $270.
Without IBR, Alex’s payment on a 10-Year Standard Plan for a typical loan balance would be significantly higher.
Who Is Eligible for IBR?
To qualify for IBR, you must demonstrate a “partial financial hardship” (PFH). You meet this requirement if your calculated IBR payment is lower than what you would pay on the 10-Year Standard Repayment Plan.
IBR is available for most federal loans, including:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans made to students and Direct Consolidation Loans
- Most Federal Family Education Loan (FFEL) Program loans
Private student loans are not eligible for IBR or any other federal income-driven plan.
How Does IBR Compare to the SAVE Plan?
While IBR was once a primary option, the newer SAVE (Saving on a Valuable Education) plan offers more significant benefits for most borrowers. For this reason, many financial advisors recommend the SAVE plan over IBR.
| Feature | Income-Based Repayment (IBR) | Saving on a Valuable Education (SAVE) |
|---|---|---|
| Monthly Payment | 10% or 15% of discretionary income | 5%–10% of discretionary income |
| Protected Income | 150% of poverty guideline | 225% of poverty guideline (lowers payments) |
| Interest Subsidy | Covers unpaid interest on Subsidized Loans for the first 3 years only. | Covers all remaining interest each month. Your balance won’t grow if you make your payment. |
| Forgiveness Term | 20 or 25 years | 10–25 years (based on original balance) |
The SAVE plan’s higher income protection and complete interest subsidy make it the superior choice for the majority of borrowers today.
Key Considerations for IBR
- Annual Recertification: You must recertify your income every year. Forgetting to do so will cause your payment to increase to the standard amount and may cause unpaid interest to be capitalized (added to your principal).
- Potential Tax on Forgiveness: After the 20- or 25-year term, any forgiven loan balance could be considered taxable income. The Consolidated Appropriations Act, 2021, prevents this on a federal level through 2025, but the taxability of forgiven student debt after that is uncertain. This could result in a large, unexpected tax bill, sometimes called a “tax bomb.”
- Review Your Options: The student loan landscape changes. Review your repayment plan annually to ensure it still meets your needs, especially with more advantageous plans like SAVE now available.
Authoritative Source:
- Income-Based Repayment Plan Details (Federal Student Aid)