A New Way to Repay

On July 1st, a new option for student loan repayment will be in effect. The option is called Income Based Repayment (IBR) and according to Finaid.org, it is "designed to make repaying education loans easier for students who intend to pursue jobs with lower salaries, such as careers in public service." IBR differs from ordinary repayment because the size of monthly payments depend on the borrower's income, not the amount of the loan. Some new features of this repayment plan include the following:

• Monthly payment amounts are capped by 15% of the borrower's discretionary income. The payment amounts are adjusted annually based on changes in the borrower's income or family size.

• IBR calculates discretionary income by finding the difference between adjusted gross income and 150% of the poverty line in your state. You can find more information about the poverty line by visiting the Department of Health and Human Service's website here.

• There is no minimum payment.

• The maximum repayment period is 25 years. After 25 years, all outstanding debt is forgiven. This discharged debt is then considered taxable income, so borrowers who use the IBR plan will have to pay income taxes on the discharged amount 25 years from the date on which repayment began.

• Borrowers who make 120 payments under IBR while working at a public service related job for ten years will have their remaining balance on their loans forgiven. This ten year forgiveness is tax free.

• If your repayments under IBR are too small to cover the interest accruing on your subsidized Stafford loan(s), the federal government will pay the interest for three years under IBR.

• The option is available for previous and current loans.

• This option does not apply to students who are still in school and making payments. The option is only available after the six month grace period.

IBR is not guaranteed forever. Whether or not it remains an option depends on how it functions in practice. For more information about Income Based Repayment and for examples of how it works, check out Finaid.org's website here. You can also contact the Department of Education directly for more details.