Income Based Repayment (IBR) Program and Pay As You Earn (PAYE)
|Repayment Estimator || Income-Based Repayment Plan Selection Form: English and Spanish|
|Q&As about Income-Based Repayment Plan (IBR) || Q&As about Pay As You Earn (PAYE)|
The IBR, PAYE and ICR plans help borrowers keep their loan payments affordable with payment caps based on their income and family size. You can repay all FFEL and Direct student loans using IBR, except for parent PLUS loans. Borrowers with grad PLUS loans may also use IBR. PAYE and ICR (described below) are only for Direct Loan borrowers.
Income Based Repayment (IBR)
To qualify for IBR, you have to show that you have enough debt relative to income. IBR then uses a sliding scale to determine how much you can afford to pay each month. If you earn below 150% of the poverty level for your family size, your payment will be 0. If you earn more than 150% of the poverty level, your loan payment will be capped at 15% of whatever you earn above that amount. Except for the highest earners, this amount will usually be less than 10% of total income. Parent PLUS loans are not eligible to be repaid under IBR (or ICR or PAYE). However, parent PLUS borrowers can consolidate the PLUS loans and then choose ICR for the new Direct Consolidation loan.
After the initial calculation, your payment may be adjusted each year based on changes in income and family size. You will have to verify your income every year.
You may request IBR electronically on the StudentLoans.gov Web site. Using this site, you will enter your personal information into the Electronic IBR Application, authorize a transfer of tax information using the IRS Data Retrieval Tool, and review, electronically sign and submit the completed form online.
You should be able to use this site to initially applly for IBR, PAYE, and/or ICR, meet the annual income documentation requirement, and request recalculation of your monthly payment due to a change in circumstances.
The annual process of recertifying IBR/ICR/PAYE should look like this:
- Under all three plans, borrowers are required to submit updated income documentation annually
- Borrowers must annually certify their family size or a family size of one will be used
- The reevaluation date is based on when the borrower initially entered the plan (anniversary date)
- Borrowers whose loans are serviced by Department of Education servicers or who have FFEL loans serviced by Department of Education servicers can use the electronic application to recertify their income and family size
- Borrowers will receive notice that they must submit income and family size information/documentation and the consequences of not doing so. Notices will be sent no earlier than 90 days and no later than 60 days prior to the annual deadline.
- Borrowers submitting income documentation within 10 days of the deadline will have their current payment amount maintained until income documentation is processed and a new payment amount is calculated
- If the borrower provides the documentation within 10 days of the deadline, the loan holder’s inability to determine a borrower’s new payment amount by the borrower’s anniversary date will no longer result in automatically increased payment amounts and capitalization of all outstanding interest.
You can stay in IBR even if you no longer qualify because of increases in your income. If this happens, your payments will be no more than the 10 year standard monthly payment amount, based on the balance you owed when you first entered the IBR repayment plan. Your repayment period may be longer than 10 years, but any interest that has accrued will be capitalized (added to the loan balance).
You can choose to make higher payments if you can afford it while you are in IBR. You might want to do this to try to pay off the principal sooner. You should tell your servicer in writing, along with the loan payment, that you want the extra money to be applied to the loan principal. Be sure to follow up to make sure that the payment was applied properly.
If you are married and both you and your spouse have student loans, the IBR formula considers you and your spouse’s joint federal student loan debt as well as your joint income if you file taxes jointly. If you are married, but file income taxes separately, only your income will be counted in determining the IBR repayment amount. However, you may lose certain tax benefits by filing separately. You should consult a tax professional if you are considering this.
Alert: The Department announced in December 2013 that borrowers will be considered married for purposes of the federal student aid programs if they were legally married in any domestic or foreign jurisdiction that recognizes the relationship as a valid marriage, regardless of where the couple resides. This means that the Department will recognize both same sex and opposite sex marriages.
If you are in default, you must first get out of default in order to select the IBR plan.
If you continue making IBR payments for 25 years, any debt that remains is canceled. This canceled amount will be taxed as income. However, you may not have to pay taxes even if the forgiven amount is considered taxable income. For example, you may be able to claim insolvency status using I.R.S. Form 982. It is a good idea to consult a tax professional for more information.
The Project on Student Debt’s IBRInfo web site has even more information, including a helpful FAQ section.
Pay As You Earn (PAYE)
The “Pay as You Earn” Repayment Plan became available on December 21, 2012. It is very similar to IBR, with a few exceptions. If you are eligible for the Pay as You Earn Plan, the “forgiveness” period will be 20 years instead of 25 years and you will be required to pay no more than 10% of your income toward federal student loans rather than 15%.
The Department has a web site with information about PAYE and a fact sheet that includes sample monthly repayment amounts and information about how to apply. There is a repayment plan selection form that allows you to request the payment plan that provides you with the lowest monthly payment.
You may request PAYE electronically on the StudentLoans.gov web site. You should be able to use this site to initially applly for IBR, PAYE, and/or ICR, meet the annual income documentation requirement, and request recalculation of your monthly payment due to a change in circumstances.
ALERT: Only certain “new” borrowers qualify for the “Pay As You Earn” plan. As of July 1, 2014, all new borrowers qualify for the more generous Pay as You Earn plan provisions such as 20 year forgiveness instead of 25 years and the more generous repayment formula. President Obama made an announcement in June 2014 that included some proposed changes to income-driven repayment. The idea is to extend the more favorable Pay as You Earn terms to all borrowers with older loans. However, this is just a proposal for now. This will not happen overnight. It will only happen if the Department of Education successfully amends the regulations. The timing is not clear. President Obama said that his goal is to make the new plan available to all borrowers by December 2015.
The ICRP is available only in the Direct Loan Program, including the Direct Loan consolidation program. The required payment can be no greater than 20% of any earnings above the poverty level. The Department has an on-line calculator to help you estimate payments amounts under ICR. If you are married, your joint income will be counted in figuring out the ICR repayment amount regardless of whether you file taxes jointly or separately.
Parent PLUS loans are not eligible to be repaid under ICR (or IBR or PAYE). However, parent PLUS borrowers can consolidate the PLUS loans and then choose ICR for the new Direct Consolidation loan. (See the Department’s answer to Question 12 explaining this issue).
If you continue making ICRP payments for 25 years, any debt that remains is canceled. This canceled amount will be taxed as income. However, you may not have to pay taxes even if the forgiven amount is considered taxable income. For example, you may be able to claim insolveny status using I.R.S. Form 982. It is a good idea to a tax adviser or professional for more information about possible tax consequences.
FFEL Income Sensitive Repayment
The FFEL program offers Income Sensitive Repayment Plans (ISRP). With these plans, your monthly loan payment is calculated based on your expected total monthly gross income. Adjustments are made every year.
You are required to submit income information to the lender in order to establish an Income Sensitive Repayment Plan. These plans are generally less affordable than the Income Contingent Repayment Plan (ICRP) available for Direct Loans and IBR. This is because monthly payments under an ISRP, unlike ICR and IBR, must cover at least accruing interest. Exact payment amounts are set at the lender’s discretion.