Income-based repayment (IBR) is a popular student loan repayment plan that seeks to help borrowers manage their monthly payments by adjusting them according to their income and family size. Essentially, it aims to provide financial relief for borrowers whose debt is high relative to their income. In this article, we will explore the process of calculating the income-based repayment for federal student loans.

Eligibility for Income-Based Repayment

Before diving into the calculation, let’s briefly discuss eligibility criteria. To qualify for IBR, you must have federal student loans under the following programs:

– Direct Loan Program

– Federal Family Education Loan (FFEL) Program

– The Federal Perkins loan program (if consolidated)

Loans taken out for parents, such as the Direct PLUS loan for parents and FFEL Parent PLUS loans, are not eligible for IBR.

The Calculation Process

The calculation of income-based repayment is based on two main factors: your discretionary income and your family size. Your monthly payment amount will be capped at 10% or 15% of your discretionary income, depending on when you borrowed your first loan.

Step 1: Determine your discretionary income

Discretionary income is an essential element in determining your IBR payment amount. It is calculated by subtracting a preset poverty guideline amount from your adjusted gross income (AGI). The poverty guideline amount depends on your family size and the state you live in.

To calculate your discretionary income:

Discretionary Income = Adjusted Gross Income – (Poverty Guideline x 1.5)

Step 2: Calculate the percentage of discretionary income

Depending on when you borrowed your first loan, you’ll multiply your discretionary income by either 10% or 15%. If you’re a new borrower on or after July 1, 2014, you’ll use 10%. Otherwise, if you borrowed before July 1, 2014, use 15%.

Percentage of Discretionary Income = Discretionary Income x (0.1 or 0.15

Step 3: Divide the percentage of discretionary income by 12

Finally, to determine your monthly IBR payment amount, divide the percentage of your discretionary income by 12.

Monthly IBR Payment = Percentage of Discretionary Income ÷ 12

Keep in mind that your repayment period will last for a maximum of 20 or 25 years, after which any remaining loan balance will be forgiven. For new borrowers on or after July 1, 2014, the repayment period is set at a maximum of 20 years. If you borrowed before July 1, 2014, the maximum repayment period is typically 25 years.

It’s essential to understand the calculation process for income-based repayment so that you can make informed decisions about your student loan repayment strategy. This method offers temporary relief from high monthly payments and allows borrowers to focus on long-term financial goals like building credit and saving for retirement. However, always remember that extending your repayment period may result in paying more interest over time.