Borrowers who have only a short-term temporary income shortfall may be better off seeking an economic hardship deferment. Having a large household size also helps. The IBR program is best for students who will be pursuing public service careers and borrowers with high debt and low income. If your payments don’t cover the interest that accrues, the government pays or waives the unpaid interest (the difference between your monthly payment and the interest that accrued) on subsidized Stafford loans for the first three years of income-based repayment. In addition to discharging the remaining balance at the end of 25 years (10 years for public service), the IBR program also includes a limited subsidized interest benefit. The borrower must have made 120 payments as part of the Direct Loan program in order to obtain this benefit. Unlike the 25-year forgiveness, the 10-year forgiveness is tax-free due to a 2008 IRS ruling. And because you will be paying the tax so long from now, the net present value of the tax you will have to pay is small.Ī new public service loan forgiveness program will discharge the remaining debt after 10 years of full-time employment in public service. But the savings can be significant for students who wish to pursue careers in public service.

Under current law, the amount of debt discharged is treated as taxable income, so you will have to pay income taxes 25 years from now on the amount discharged that year. After 25 years, any remaining debt will be discharged (forgiven). The maximum repayment period is 25 years. In such a circumstance you can file an alternative documentation of income form to get an adjustment to your monthly payment. For example, your income may be lower this year due to job loss or a salary reduction. In some cases the prior year’s income figures may not be reflective of your financial circumstances.

Income-based repayment is based on the adjusted gross income during the prior tax year. Unlike income-contingent repayment, which is available only in the Direct Loan program, income-based repayment is available in both the Direct Loan program and the federally-guaranteed student loan program, and loan consolidation is not required. Income-based repayment caps monthly payments at 15% of your monthly discretionary income, where discretionary income is the difference between adjusted gross income (AGI) and 150% of the federal poverty line that corresponds to your family size and the state in which you reside. Both cap the monthly payments at a percentage of your discretionary income, albeit with different percentages and different definitions of discretionary income. Income-based repayment is similar to income-contingent repayment.

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