How Income-Based Repayment Works

Qualifying for Income-Based Repayment

Income-based repayment can significantly reduce monthly payments on student loans, but you must meet certain eligibility criteria. Most importantly, IBR is only available for federal student loans, not private loans. If you received loans through your school by filling out a FAFSA (Free Application for Federal Student Aid), then you have a federal loan. If you received a loan from a bank or other institution, then you have a private loan.

Also, not all federal student loans are eligible for IBR. Parent PLUS Loans -- supplemental student loans made directly to parents of college students -- are not eligible. Neither are FFEL Consolidation Loans that include a Parent PLUS Loan. And here's a biggie: IBR cannot be used on any loan that is already in default, so keep making payments until you are accepted.

Here is a full list of eligible loans:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans made to graduate or professional students
  • Direct Consolidation Loans without underlying PLUS loans made to parents
  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • FFEL PLUS Loans made to graduate or professional students
  • FFEL Consolidation Loans without underlying PLUS loans made to parents [source: Federal Student Aid]

If you don't know what kind of loan you have, or who services your loan, you can access that information at the National Student Loan Data System. You will need your Social Security number and your Federal Student Aid PIN. If you forgot your PIN, you can retrieve it from the Federal Student Aid PIN website.

Once you know what kind of loan you have, you need to plug your loan and income information into the IBR calculator. Here's how the calculator works. The calculator figures out the difference between your adjusted gross income (AGI) and 150 percent of the poverty income level for a family of your size in your state. The poverty line for a family of three in most states, for example, is $27,795. If you make $40,000 a year, then the difference is $12,205. Under the IBR, annual loan payments cannot be more than 15 percent of this difference, or $1,831, which breaks down to $153 a month [source: Federal Student Aid].

The IBR calculator will tell you if you qualify or not. Basically, if your IBR-calculated payment is less than the standard 10-year payment plan, then you qualify. Once you qualify, you will need to contact your loan servicer to start the application process. Remember, you can look up your loan servicer information on the National Student Loan Data System Web site.

Income-Based Repayment sounds like a great deal, but it does carry some hidden disadvantages. We'll discuss the advantages and disadvantages of IBR on the next page.