How Income-Based Repayment (IBR) Works

The Income-Based Repayment (IBR) plan is a federal student loan payment plan that sets your monthly payments at a percentage of your discretionary income. After making payments for 20 years, you’ll be eligible to have any remaining loan balance forgiven.

The IBR plan is a useful, long-term solution for borrowers who have trouble affording their debt payments. Here’s what you need to know about IBR so you can decide if this payment plan is right for your federal student loans.

What is Income-Based Repayment?

If you have federal student loans, you're automatically enrolled in the Standard Repayment plan when you enter repayment. Under this plan, you make equal payments of at least $50 every month for 10 years, at which point you will have paid off the loan.

However, some borrowers may struggle to afford their payments. In that case, IBR could help lower monthly costs. The exact terms of your IBR plan depend on when you borrowed your loan: 

• If you’re a new borrower on or after July 1, 2014, your payments are set at 10% of your discretionary income. You must make payments for 20 years, after which any remaining balance on your debt can be forgiven. 
• If you were an existing borrower before July 1, 2014, your payments are set at 15% of your discretionary income. You must make payments for 25 years before qualifying for forgiveness.  

If you’re repaying your loans under IBR, your monthly payments will adjust with your income as long as you recertify your earnings annually. If your income decreases, so will your payments. If you start earning more, your payments will increase. 

However, payments under IBR will never be greater than what you would have paid under the Standard Repayment plan, even if your income continues to increase.

Discretionary income example

For the IBR plan, discretionary income is determined by taking the difference between the borrower’s annual income and 150% of the poverty guideline for the borrower’s family size and location.

For instance, say Ezra earns $55,000 per year and is a single parent of three children. The federal poverty guideline for his family is $30,000. Ezra’s discretionary income is his annual income ($55,000) minus 150% of the $30,000 poverty guideline ($45,000).

$55,000 - $45,000 = $10,000

For the purposes of calculating his IBR payments, Ezra’s annual discretionary income is just $10,000.

IBR eligibility

Not every borrower qualifies for IBR, and certain conditions must be met before you enroll. Federal Student Aid’s loan simulator tool can help you determine your eligibility and estimate your payments under IBR.

To qualify for IBR, you must:

Have eligible federal loans

Only federal loan borrowers with these types of loans can enroll:

• Direct Subsidized and Unsubsidized Loans
• Direct PLUS loans made to graduate or professional students
• Direct Consolidation Loans (that didn’t repay any parent loans)
• Federal Family Education Loan (FFEL) program loans (that were not made to parents)

Loans made to parents, including PLUS Loans and Consolidation Loans that are repaid by a parent's loan, are not eligible. In other words, IBR is only for student borrowers.

Meet income requirements

The amount you pay under an IBR plan must be less than what you would pay under the 10-year Standard Repayment plan. Generally, borrowers may meet this requirement if their federal student debt is greater than their annual discretionary income or represents a large portion of their yearly income.

If you earn too high a salary in relation to your student debt, you may not qualify.

Not be in default

Borrowers who have defaulted on their student loans are not eligible for IBR. Your loans must be in good standing for you to enroll.

How to apply for IBR

It’s relatively easy to apply for IBR, though you must submit paperwork annually to maintain eligibility. Here are the steps borrowers must follow to apply:

• Navigate to the Income-Driven Repayment (IDR) plan request form: You will find login options for both new applicants and existing IDR borrowers.
• Fill out the application: The form should take no more than 10 minutes to complete. You will be asked to do the following as part of the application:
  • Confirm your personal data and loan information.
  • Provide documentation about your income.
  • Choose the repayment plan you want.
  • Agree to the terms and conditions.
• Recertify each year: Once you’ve signed up for the IBR plan, you must recertify your income and family size each year. The recertification deadline is one year after starting or renewing your IBR plan.

Pros and cons of IBR

IBR can be helpful to struggling borrowers, but it’s not necessarily right for everyone. Here are some of the benefits and drawbacks of this repayment plan:

Pros

• Reduced monthly payments: Since your payment amount is determined by your personal situation, it may better fit into your budget.
• Potential for loan forgiveness: After making 20 or 25 years of payments, any remaining loan balance can be forgiven.
• Potential interest subsidy on subsidized loans: If your monthly payment doesn’t cover all of the interest that accrues on your subsidized loans, the federal government will pay the remaining interest costs for up to three years after enrolling in the IBR plan.

Cons

• Longer repayment period: Rather than paying off your loans in 10 years, you’ll be in debt for two decades or more.
• Increased interest costs: A longer repayment period typically means paying more in interest. Even with the promised forgiveness, you may pay more over the life of your loan under IBR than you would with other options.
• Tax implications: If you have a remaining balance after you complete your required payments, that balance can be forgiven. But income-based loan forgiveness is typically treated as earned income, and you will owe taxes on that amount.

Who can benefit from IBR?

There are several factors that could make a borrower a good candidate for IBR. This plan might help you if:

• You’re a new borrower after July 1, 2014: Borrowers who took out their loans prior to this date must pay a higher portion of their income and are required to make payments for five extra years.
• You have a high loan balance compared to your income: If your loan balance is larger than your discretionary income, you could generally benefit from an IBR plan.
• You plan to file taxes individually: Married borrowers who file taxes together must include their joint income in IBR calculations. This means that unmarried borrowers or those who file taxes separately are more likely to benefit from IBR.
• You don’t qualify for a better repayment plan: There are a number of different income-driven repayment plans, some of which may offer you better terms. Use Federal Student Aid’s loan simulator tool to compare your repayment options and estimate costs.

Alternatives to IBR

IBR isn’t the only option for borrowers struggling to make payments on their federal student loans. Some other alternatives include:

Other federal income driven-repayment plans

These are the SAVE, PAYE, and Income-Contingent Repayment plans, some of which may offer better terms for your situation. The SAVE plan became available in August 2023, and is the most affordable plan available. Compare your options to see what makes the most sense. 

Standard Repayment plan

Depending on your income, you may not save any money by switching to IBR. In that case, it could make sense to remain on the standard 10-year repayment schedule.

Graduated Repayment plan

Under this plan, your payments start out low and slowly increase every two years. Depending on your loan, the Graduated Repayment plan may last between 10 and 30 years. Your lowest monthly payment will never be less than the amount of interest that accrues between your payments.

Deferment or forbearance

Federal student loan borrowers can get temporary relief through deferment or forbearance, which both allow you to temporarily postpone your monthly payments. Interest often continues to accrue during these pauses, so your loan balance could increase.

Refinance for better terms

Refinancing your loans with a private lender could potentially lower your interest rate, shorten your repayment term, or reduce your monthly payment, depending on the terms and conditions you qualify for. 

However, refinancing federal loans with a private lender will mean giving up all the federal protections and repayment options. You’ll no longer be eligible for IBR or other income-driven repayment options if you refinance your federal loans.