An income-based repayment plan will lower your student loan payments and possibly forgive some of your debt, but there are risks. What you need to know...

Tired of devoting so much of your paycheck to student loans every month?

For many, big student loan payments are a barrier to achieving other financial goals. For others, they’re the root of more serious financial woes: According to the Wall Street Journal, more than 40 percent of borrowers are currently either in default or delinquency.

Fortunately, an income-based repayment plan may offer some relief. Thanks to ongoing (but little known) changes in the law, a growing number of student loan borrowers are enrolling in an income-based repayment plan instead of a standard repayment plan.

When you graduate from college, the Department of Education automatically enrolls borrowers in a 10-year, fixed-payment plan no matter what a person’s financial situation may be.

But you have other options—like IBR.

The income based repayment program offers myriad benefits, including:

  • Capping monthly loan payments to as little as 10 percent of a debtor’s income, after deductions for basic living expenses
  • Forgiving loan balances after 20 years
  • Forgiving loan balances after 10 years for anyone working in public sector or non-profit jobs
  • No adverse effect on your credit score

In other words, with an IBR plan, if don’t make a lot of money, you don’t repay a lot of money.

If you’re not earning anything—like a number of millennials—then you don’t have to pay anything back, and your loan doesn’t go into default. And if your run of bad luck in the job hunting department lasts for a decade or two, well…that won’t be great… but at least you won’t have those pesky student loans to worry about anymore. Under the IBR plan, all balances will be forgiven.

To qualify for IBR, the borrower must:

  • Have too much debt compared to income
  • Have federal student loans in either the Direct or Guaranteed (FFEL) loan program

It’s fairly easy for most millennials to meet this threshold.

Consider this example: A single millennial gets a job upon graduation that pays $30,759, the median young adult income. He owes $28,400, the average student loan debt, and has a 3.4 percent interest rate.

Under a standard repayment plan, the borrower would pay $279.51 per month.

Under the IBR plan, the borrower would pay $163 per month.

Of course, there are some disadvantages to an IBR:

  • If your income increases, so will your payments. (And you can’t fib about your income; tax returns are required for annually to qualify for an IBR plan.)
  • You’ll pay more interest.

“You have to consider the amount of interest that will accrue over 20 years compared to the interest that will accrue over ten years,” says Nicole Mazzella, an Assistant Director in the Financial Aid Office at Loyola University Chicago. “The loan could still be more expensive even if a portion is forgiven.”

Still, in today’s cash-strapped world, more people are opting for IBR: 11.8 percent of borrowers enrolled in IBR in 2014, up from 6 percent in 2013.

Not everyone loves IBR plans. Some government officials say letting people off the hook for student loans, which the government originally financed, will cost the feds an obscene amount of money, with the burden ultimately falling on taxpayers.

Like all issues related to money, you’ve got to weigh the pros and cons of enrolling in an IBR plan. “If a person is having difficulty making payments under the Standard plan, it’s much better to switch to an IBR than to go into default or not be able to pay their bills,” Nicole says. “And in some ways, it can certainly help a person who is struggling to get ahead financially.”

To find out if you might qualify for IBR, and what you might pay, use this calculator.

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Corrections and amplifications: A commenter pointed out that cancelled debts can be taxed as income, which is true. In some cases, the tax assessment created by a cancelled debt could be as burdensome as the original debt itself (while the tax would be less than the amount owed, it would come due all at once rather than over many years). However, qualified federal student loans that are canceled under certain IBR plans, public service forgiveness or healthcare forgiveness programs are NOT taxable, per IRS Publication 970, Section 5. In any case, it would be wise to consult a tax advisor prior to anticipating having a student loan cancelled to ensure you understand the tax consequences.

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About the author

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Patty Lamberti is a freelance writer and Professional-in-Residence at Loyola University Chicago, where she teaches journalism and oversees the graduate program in digital media storytelling. If she doesn't know something about money, you can trust she'll track down the right people to find out. You can learn more about her at And if you have any story ideas, or questions about money etiquette that you'd like her or an expert to answer, email her at [email protected]