Table of Contents
- What is IBR and how does it work?
- What to know about IBR in 2024, 2025 and beyond?
- How is your income-based repayment plan calculated?
- What factors impact your income-based repayment plan?
- How can you calculate the savings from switching to IBR?
- How are the first and last month’s payments calculated?
- How is the total cost of the loan calculated?
- How is the total forgiveness calculated?
What is IBR and how does it work?
Income-driven repayment (IDR) was introduced in 1994 as part of a Congressional effort to make student loan repayment more affordable. Income-based repayment (IBR) is a specific type of IDR plan that was first made available to borrowers in 2009.
In its initial phase, IBR capped borrowers’ monthly payments at 15% of discretionary income, with loan forgiveness available after 25 years. In 2014, IBR was updated to cap payments at 10% of discretionary income and the window for loan forgiveness was shortened to 20 years.
Here’s a quick look at all IDR plans available as of 2024.
| IDR Plan | Payment Cap (% of Discretionary Income) | Loan Forgiveness |
| Saving on a Valuable Education (SAVE) (formerly the REPAYE plan) | 5% for undergraduates Weighted average between 5% to 10% for graduate loans | 20 years (undergraduate loans) 25 years (graduate loans) |
| Pay As You Earn (PAYE) | 10% | 20 years |
| Income-Based Repayment (IBR) | 10% (for loans after July 1, 2014) 15% (for loans before July 1, 2014) | 20 years (for loans after July 1, 2014) 25 years (for loans before July 1, 2014) |
| Income-Contingent Repayment (ICR) | 20% | 25 years |
A federal court injunction prevents the U.S. Department of Education from implementing certain aspects of the SAVE, PAYE, and ICR plans. For that reason, we’ll focus only on IBR for this guide.
What to know about IBR in 2024, 2025 and beyond?
IBR borrowers must recertify their income and household size each year to maintain eligibility. The Department of Education temporarily suspended this requirement during the pandemic but has since reinstated it.
For 2024, the deadline to recertify was pushed back to November 1st, but no other IBR changes are currently on the horizon.
There’s one important thing to note for 2026, however. The American Rescue Plan Act of 2021 temporarily exempted student loans forgiven through IDR plans from being included as taxable income. Unless new legislation is passed, student debt forgiven through IBR or other IDR plans after January 1, 2026, will once again be taxable.
How is your income-based repayment plan calculated?
Income-based repayment plans are calculated based on a borrower’s discretionary income. The Department of Education defines discretionary income as “the difference between your annual income and 150% of the federal poverty guideline for your family size and state of residence.”
The percentage of discretionary income used to determine your payments depends on whether you took out your loans before or after July 1, 2014. As mentioned, you must recertify your household income and family size with the Department of Education each year to maintain eligibility for IBR and determine if your payments must be recalculated.
What factors impact your income-based repayment plan?
Several factors influence what you pay under an income-based repayment plan. They include your:
- Adjusted gross income (including your spousal income if you file a joint tax return)
- Household size
- State of residence
- Federal poverty guideline for your household size
- Loan type
- Loan balance
IBR covers most loans made through the Direct Loan Program and Federal Family Education Loan (FFEL) Program, excluding Direct or FFEL PLUS Loans for parents and Direct or FFEL Consolidation Loans used to repay a Direct or FFEL Parent PLUS Loan.
How can you calculate the savings from switching to IBR?
To estimate your monthly savings with an IBR plan, you would need to:
- Find your AGI on your tax return
- Determine the federal poverty guideline for your household size
- Multiply that amount by 150% and subtract it from your AGI to get your discretionary income
- Multiply your discretionary income by 10% or 15%, depending on when you took your loans
- Divide the result by 12 to get your monthly payment
For example, assume you’re a single person with an AGI of $30,000. The federal poverty guideline for a single person in your state is $15,060. Your current student loan payment is $305/month.
The math would look like this:
[$30,000 – (150% x $15,060)] x 10% / 12 = $188.25/month
You’d then subtract the new payment amount calculated for IBR from your current monthly payment.
$305 – $188.25 = $116.75 in savings
Student loan calculators can do the math for you. You’ll just need to input the required information.
How are the first and last month’s payments calculated?
Your first and last month payments for IBR are always calculated as a percentage of your discretionary income, using the formula outlined above.
If your discretionary income never changes while you’re on an IBR plan, your first and last month’s payments would be the same. If your income increases or there’s a change to your household size, then your first and last month payments may be different.
The IBR calculator above assumes a 3.5% rate of annual income growth.
How is the total cost of the loan calculated?
The total cost of your loan under an IBR plan is calculated based on your:
- Monthly payment amount
- Number of payments you make
- Interest rate
It’s possible that under an IBR plan, your total loan cost may exceed what you’d pay with a standard 10-year repayment plan. However, that difference may be offset by the amount that you have forgiven at the end of the loan term.
How is the total forgiveness calculated?
Your forgiven loan amount is what’s left after 20 or 25 years’ worth of payments on an IBR plan, depending on when you took out your loans. It’s calculated based on what you pay in total to the principal and interest on your loans over the life of the loan term.
It’s possible that you’ll repay your loans before the IBR period ends. In that case, there would be nothing to forgive since your loan balance would be $0.
About our contributors
-
Written by Rebecca Lake, CEPF®Rebecca Lake is a certified educator in personal finance (CEPF®) and freelance writer specializing in finance.
-
Reviewed by Michael Menninger, CFP®Michael Menninger, CFP®, is the founder and president of Menninger & Associates Financial Planning. He provides his clients with financial products and services, always keeping their individual needs foremost in mind.