How-to Reduce Student Loan Payments: Lower Monthly Education Debt

The Department of Education is allowing qualifying individuals to reduce their monthly student loan payment under the new Income Based Repayment Plan (IBRP). This new program is primarily designed to benefit those people who owe a high amount of debt relative to their income and family size and those people eligible to participate in the Public Service Loan Forgiveness Program. Under IBRP, the minimum payment may be adjusted each year based on a borrower’s income and family size, however; the payment will never exceed the standard 10-year repayment amount. In some cases, individuals may even be allowed to temporarily stop making repayments.

What Loans Are Eligible to be Repaid Under the Income Based Repayment Plan Program?

There are several different types of federal student loans eligible to be repaid under the IBRP program. Stafford, Grad PLUS, or consolidation loans made under the Direct Loan or FFEL program are eligible to be repaid unless specifically excluded. Loan types specifically excluded are parent PLUS loans, consolidation loans that repaid a parent PLUS Loan, or any loans that are currently in default.

How to Apply for Lower Student Loan Payments Under the Income Based Repayment Plan Program

A borrower must first contact their lender to find out if they qualify for the IBRP program. The lender will verify that the type of loan is acceptable and will perform a calculation to determine the borrower’s eligibility to participate in the program. The calculation is based on the borrower’s annual gross income, family size, and state of residency. If this calculation yields an amount lower than the 10-year standard repayment plan, the borrower is eligible to participate in the IBRP program. The Department of Education has also released an Income Based Repayment Plan calculator for borrowers to use in order to estimate if they will benefit from the program.

Advantages of the Income Based Repayment Plan Program

There are additional advantages besides the obvious benefit of lowering a borrower’s monthly payment to less than what would be required under the 10-year standard repayment plan. Those other advantages include but are not limited to the following:

  • Assistance with Student Loan Interest – The Government will pay the monthly interest for up to three consecutive years if the new IBRP payment does not cover the interest on a Subsidized Stafford Loan (made under the Direct Loan of FFEL program).
  • Cancellation of Student Loan Amount – The Government will cancel the remaining loan debt after 25 years if all program requirements are met including making timely month payments under the IBRP program.

Disadvantages of the Income Based Repayment Plan Program

In addition to the benefits of this program there are some inherent disadvantages. The primary disadvantages are as follows:

  • Annual Documentation Requirement – Under the IBRP program, the loan payment may be adjusted each year based on a borrower’s annual income and family size. The borrower must submit updated documentation each year or the repayment amount will automatically revert back to the 10-year standard repayment plan which is not based on a borrower’s income or family size.
  • Increased Student Loan Interest – A borrower will ultimately end up paying more in overall interest the longer it takes for them to repay the loan. Since the payments are reduced under the IBRP program, it will extend the repayment period thus resulting in more interest being paid over the life of the loan. However, note that there is a student loan interest tax write-off available to many borrowers which can be taken on an individual income tax return.