Income-based repayment programs (IBR) are some of the most helpful tools federal student loan borrowers can use to avoid default. However, a new Consumer Financial Protection Bureau (CFPB) report claims many borrowers are not told these programs exist. The report also claims applications for these programs are not getting processed. If this report is accurate, student loan borrowers are being stuck with unaffordable payments because loan servicers are not doing their jobs.
IBR repayment programs are helpful because they allow borrowers to cap their monthly payments at 10 to 15 percent of their discretionary income. By using these programs, borrowers can have the balances of their loans forgiven after making 20 to 25 years of timely payments. Loan forgiveness happens after 10 years for borrowers enrolled in Public Loan Service Forgiveness (PLSF) plans.
Which IBR Repayment Programs Can You Choose?
There are several IBR programs to choose, but the vast majority of borrowers will utilize the following two methods. That is because IBR programs have undergone revisions and improvements over the years.
- REPAYE: The REPAYE plan may be the most helpful for struggling borrowers. This plan allows you to cap monthly payments at 10 percent of your discretionary income. This program will also forgive the remaining debt after 20 years of payments (25 years for graduate degree debts). Most people with federal loans can take advantage of REPAYE. There is also the PAYE program, which has many of the same benefits. Fewer borrowers qualify for PAYE.
- IBR: The income-based repayment program allows you to cap payments at 10 to 15 percent of your discretionary income, depending on when you received your loans. After 20 to 25 years of steady payments, your remaining balance is forgiven. The IBR program was revised for borrowers who took at loans after July 1st, 2014, to allow for loan forgiveness after 20 years, and for payments capped at 10 percent of discretionary income.
Enrolling in the PLSF program may be the most effective way to utilize IBR repayment programs. One of the major downsides to both IBR and REPAYE, is that forgiven balances are considered taxable income by the IRS. Borrowers may be hit with a huge tax bill after finishing repayments. Loans forgiven under PLSF are not considered taxable income.
The Kansas City bankruptcy attorneys at The Sader Law Firm can help students discover ways to manage loans with or without bankruptcy.