How to Pay Off Student Loan Debt Using IBR
An Introduction to IBR- Income Based Repayment
Sep 5, 2009
In order to take advantage of Income Based Repayment, or "IBR," understand the difference between varying student loan types and which ones are eligible for IBR. Most federal student loans are eligible for IBR.
Federal Student Loans
Federal student loans can be Direct Loans or Federal Family Education Loans ("FFEL"). The difference between these two major categories of federal student loans is that Direct Loans are given by the federal government directly to a student, and FFELs are loans made by private organizations and guaranteed by the government. "Guaranteed" means the government will repay the organization even if the student fails to repay the loan. FFELs should not be confused with private student loans.
Stafford Loans
Stafford Loans are offered via both Direct Loans and FFELs. They are available for both graduate and undergraduate students who go to school at least half-time.
Stafford Loans can be subsidized or unsubsidized. When a loan is subsidized, the government pays the interest on the loan while the recipient is still in school. Subsidized Stafford loans are need-based; higher income student are only eligible for unsubsidized Stafford loans.
There is no credit check during the application process for a Stafford loan.
PLUS Loans
PLUS loans are given to parents who are paying for a dependent student's undergraduate education. The student must attend at least half-time. PLUS loans are offered via Direct loans and FFELs. A credit check is required of applicants.
Perkins Loans
Perkins loans are also federal student loans; they have a very low interest rate and are only available to students who demonstrate exceptional financial need. The government provides funds for Perkins loans to the school. Recipients of Perkins loans repay the school after graduation (or whenever repayment begins).
To Qualify for IBR
IBR stands for Income Based Repayment. It should not be confused with similarly named programs, such Income Contingent Repayment Plan. To qualify for IBR, graduates and former students:
- Must be looking to repay federal student loans, not loans through private companies that are not guaranteed by the federal government.
- Must consolidate student loans with the federal government.
- Must meet income requirements.
- Must authorize the IRS to divulge income information to the US Department of Education.
Borrowers who have defaulted on their loans may still be eligible for IBR.
Borrowers who work in the public service sector or demonstrate their need based upon debt to income ratio can be put on an IBR plan that requires 15% of their income go toward their debt each month. It is vital to know whether the 15% is covering interest only; people who pay on the interest only see their debt rise instead of fall as the months and years go by.
Two perks of IBR are that borrowers who make their payments in full, on time, every month can be forgiven the balance after 25 years. Borrowers working in public service jobs may be forgiven after only 10 years. Borrowers may be required to pay income tax on the amount of forgiven debt.
Federal Student Loans Consolidation
The first step in qualifying for IBR is federal student loan debt consolidation.
Consolidation is not for everyone. Most borrowers have only one chance to consolidate, and must do so through a government consolidation program. Consolidating federal student loans through a private loan company renders the borrower ineligible for IBR.
Other benefits of student loan consolidation include:
- One monthly payment
- One interest rate
- Likely that interest will be lower on older loans.
Some of the cons of consolidation include:
- Consolidation extends the period of repayment; ie, borrowers repay (for example) over 15 years instead of 10
- Consolidating through a private loan company takes away rights enjoyed by federal student loan holders.
Private Student Loans
While some private companies do offer student loans, the interest is usually higher than anything the federal government has to offer. Private student loans do not have all of the benefits that federal student loans have, for example private student loans can never be repaid via IBR.
Students looking for loans are advised to exhaust all of their federal loan opportunities first before considering taking out a private student loan.
 |
