Income-Driven Student Loan Repayment (Part 3)

Income-Based Repayment and Income-Contingent Repayment! Get pumped!
student loan 3 repayment

After all that preparation in Part 1 and Part 2, it is finally time to discuss the repayment plans themselves. If you need to refer back to the terms I discussed in Part 2, go ahead and open it in a separate tab. That way you can bounce back and forth. And if you’re like me, then you even have at least six tabs open on your phone so it shouldn’t really be a big deal.

The original income-driven repayment plans are:

1) Income-Based Repayment (IBR)

2) Income-Contingent Repayment (ICR)

You’ll notice that the names of these things are almost the same term with slight variations. In a way, that makes sense, because “almost the same with slight variations” describes most of these plans quite well. But those slight variations can have serious repercussions, so depending on your situation the one that’s best may vary.


Income-Based Repayment:

Partial Financial Hardship:

Yes, you have to have this to qualify for the plan. There’s a handy guide to calculating if you’ve got a PFH in Part 2. If you’ve left the plan and want to come back, you’ll have to prove this again.

Annual/Monthly Payments:

With IBR you will pay 15% of your discretionary income every year. Math time!

We’ll stick with the Part 2 example where you have $45,000 annual income and $27,180 discretionary income.

15% of $27,180 = $4,077. That’s what you’ll pay over the course of a year.

$4,077 / 12 = $339.75. That’s what you’ll pay every month (there’s always an exception, read on for it).

Yes, if your income is low enough (or nonexistent), your payments will be $0. Because when you make $0 that also tends to be the cap on what you can afford to pay. Weird, huh?

By the way, although the size of your loan doesn’t really matter, it also sorta does. Because although there’s no minimum you could be required to pay, there is a maximum. Your IBR payment will never exceed what it would be under the standard 10-year repayment plan. So if the size of your loan is small, then you might well owe less than 15% of your discretionary income even if you have a decent salary.

The trade off with low payments, or no payments, is that your principal will remain higher longer, thus accruing more interest and probably costing you more in the long run. If you qualify for IBR but for some reason have the ability to pay more than you’re charged, I recommend doing that to minimize your interest over the lifetime of the loan.

Interest Forgiveness:

An extra bonus during the first three years of repayment. You probably have multiple loans for the same year. Although you can pay them all at once, each is separate. Check if you have any subsidized loans. If your monthly IBR payment on those loans doesn’t cover all of the interest accrued that month, whatever interest wasn’t covered is forgiven on the spot. Sure, it might just be a few dollars, but we don’t get many breaks after college and I’ll take even a penny discount if I can get it.

Loan Forgiveness:

Feeling overwhelmed? There is a banana at the end of the tunnel. Make your payments and don’t go into default for 25 years, and the Department of Education forgives whatever is left! Now, you will have to pay tax on whatever gets forgiven, because there are only so many tax breaks to go around and cartoon villains and spoiled heiresses called dibs on most of them already. $0 payments count toward the 25 years if that’s what you owed based on your income. Any months you received a forbearance or any deferment other than one for economic hardship DO NOT count.

Perks of Being a “New Borrower”:

“IBR for New Borrowers” is technically a different plan, but it’s almost the same as the classic variety with two tweaks. First, you get to pay 10% of your discretionary income, not 15%. Second, your loans are forgiven in 20 years, not 25. How do you know if you’re you a “new borrower”? Takes more than feeling new. If you didn’t have any student loans on July 1, 2014 and didn’t have any loans when you took out your current loans, you’re new. Congratulations!

Recertification Requirement:

As with all good things, you can screw up IBR if you don’t do your paperwork. You have to “recertify” every year. You do this by providing documentation of your income to your student loan servicer. If you’re married and file a joint federal tax return, be sure to submit their income documentation as well. If you don’t recertify by the deadline, you are kicked out of IBR and placed on the standard 10-year repayment plan. And that means your interest capitalizes, which is the worst.

Interest Capitalization:

If your income documentation shows you no longer have a partial financial hardship, your interest capitalizes. Same if you leave the plan. Check that out below. And  see how capitalization works and why it’s awful in Part 2.

Leaving the Plan:

If you don’t recertify you’re out of IBR. You can also leave voluntarily. No matter how you leave, your interest capitalizes. You also have to spend at least one month on the standard 10-year plan before moving to another income-driven plan. Why? No idea. And probably no reason either.


Income-Contingent Repayment:

ICR is probably less appealing than IBR. It’s also less fussy about what you have to do to keep it happy and stay eligible.

Partial Financial Hardship:

Doesn’t matter. There’s no income requirement. If you have an eligible Direct Loan, you qualify.

Annual/Monthly Payments:

Your monthly payments are the lesser of 20% of your discretionary income or “what you would pay under a repayment plan with fixed payments of 12 years, adjusted based on your income”. That second option still confuses me. My best guess is that it’s a 12-year fixed plan, since I thought “based on your income” was what this entire category of plans is to begin with. If you know something I don’t, please tell me because I think some lawyer was writing it and was afraid of having too many sentences without a comma in that part of the rule. So let’s do a simple example:

Your income is still $45,000 and discretionary income is still $27,180. You owe $50,000 in Direct loans.

20% of $27,180 = $5,436

$50,000 / 12 years = $4,166.66

So the 12-year fixed calculation yields the lower annual payment. For your monthly payment, just divide $4,166.66 / 12 months = $347.22 per month

Interest Forgiveness:

No interest is forgiven. Ever.

Loan Forgiveness:

Just like with standard IBR, anything remaining after 25 years is forgiven (same deferment and forbearance rules too). Get ready to pay tax on it.

Perks of Being a “New Borrower”:

None. IBR may be impressed with your youth, but ICR has seen the nastiness of this world and has other things to worry about.

Recertification Requirement:

Although there is no income requirement, you still have to recertify annually. Remember your spouse’s income documentation if you file a joint income tax return OR if you jointly repay your student loans under ICR. As per usual, failure to recertify is penalized with an automatic trip to the standard 10-year plan.

Interest Capitalization:

Even if you follow all the rules, ICR still capitalizes any remaining accrued interest at the end of each year. And it will keep doing this until your principal reaches 110% of what it was when you entered repayment. So if you started with $50,000 principal, the agony will stop once you get kicked up to $55,000. But the interest will still accrue. So don’t let this happen if you can help it.

Leaving the Plan:

Easy. Just go. Don’t expect it to retweet you anymore.

That’s it for this time. One installment left. Tune in next time for PAYE and REPAYE!


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  • Income-Driven Student Loan Repayment (Part 4 – The End!)Income-Driven Student Loan Repayment (Part 4 – The End!) – Entry Revel
    30 January 2017 at 10:29 pm

    […] in order, Part 1 and Part 2 explain rules and qualifications applicable to all income-driven plans. Part 3 discussed income-based repayment (IBR) and income-contingent repayment (ICR). So what’s […]

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