Repay Student Loans Based on Your Income

The College Cost Reduction and Access Act (CCRAA) has been a breakthrough for everyone looking to afford a higher education. There are two distinct components related to loan repayment: The first, discussed below, is Income-Based Repayment (IBR) that allows graduates to pay back their federal loans on a sliding scale based on their income. The second, discussed in last week's blog, is Public Service Loan Forgiveness (PSLF), which provides forgiveness on federal educational loans for people who work in the public service sector for 10 years.

It is very important that readers understand that these two provisions in CCRAA are not dependent on one another. Someone can participate in IBR without also participating in PSLF. In fact, IBR provides help to a much larger group of people than PSLF, because IBR does not have a "qualifying employment" element.

Income-Based Repayment is available to everyone with federal student loans—not just those who are working in the public service sector. Working for a small private employer? Have a low-paying job at a fast food restaurant? IBR might help you. IBR has the potential to help hundreds of thousands of federal student loan borrowers make their payments more manageable.

[Learn how to borrow for grad school.]

IBR payments are based on income and family size. Typically, borrowers who earn less than they owe in federal student loans will be eligible to choose IBR. For most borrowers, payments will be less than 10 percent of their income.

Here's an example for the average borrower: Say you have $100,000 in federal student loans at an interest rate of 6.8 percent, with a repayment term of 15 years. Your monthly payment would be $887. With IBR, if you are a family of one, earning an adjusted gross income of $50,000, then your monthly payment amount could be reduced to $422. If you are a family of three, your monthly payment could drop to $282. Obviously, if your salary is lower, your payments will also be lower.

There is one catch: The lower payments are based in part on a longer repayment period—25 years versus 15 years. However, if you participate in IBR and are still carrying some debt after 25 years, the remaining balance may be canceled if you meet certain requirements.

So with IBR, regardless of your debt amount, you pay an amount that you can afford based on your income. As your income grows, your payments grow. But you can afford those payments because you are making more money. Throughout the entire repayment period, most borrowers will pay 10 percent of their adjusted gross income toward educational debts. That's reasonable because payments are always pegged to income.

And remember, if you are working in the public service sector, you can take advantage of both IBR and PSLF, so that you have lower monthly payments and loan forgiveness after only 10 years. That's a great deal!

[Know where to find grad school loan forgiveness.]

Keep in mind that IBR is based on adjusted gross income, not wages. Adjusted gross income includes wages plus certain other income (like interest income) but minus specific deductions (like the student loan interest deduction and IRA contribution deduction).

In general, to qualify for IBR, you must have high debt relative to your income, and you must have federal loans—commercial and alternative loans are never eligible.

According to IBRinfo.org, more than 232,000 federal student loan borrowers have already enrolled in Income-Based Repayment. This is a great start, but so many more people can benefit.

IBR can be confusing, but there are many resources available to help you navigate the process. You should begin by using the U.S. Department of Education's IBR calculator to estimate whether you would likely qualify for the IBR plan. The Equal Justice Works resource page also provides a complete list of resources and tools that will help you determine eligibility and next steps for qualifying.

David Stern has worked for Equal Justice Works since 1992 and has served as the executive director for the past 15 years. He graduated from Georgetown University Law Center in 1985. In 2008, Stern was recognized by Legal Times as one of the "Greatest Washington Lawyers in the Past 30 Years."

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