By now, many within the financial aid community have heard of Income-Based Repayment (IBR), the new student loan repayment plan available to FFELP and Direct Loan borrowers that began on July 1, 2009. Financial aid administrators may be aware that IBR will benefit certain borrowers by minimizing monthly payments and providing loan forgiveness in some cases, but the full potential of IBR to assist in default prevention has yet to become fully apparent. Educating borrowers about this repayment plan and its benefits, through the loan counseling process and other information dissemination efforts, will prove to be the key to realizing that potential.

How IBR works
IBR is available for borrowers with Stafford, Grad PLUS, and Consolidation loans, as long as the Consolidation loan does not include a parent PLUS loan. Parent PLUS loans and any type of non-federal student loans do not qualify for IBR.

IBR will provide repayment relief to borrowers experiencing "partial financial hardship" (PFH), which is determined using a calculation that takes into account the borrower's family size and adjusted gross income (AGI). Specifically, PFH occurs when the annual payment amount for all of the borrower's eligible loans (as calculated under a standard 10-year repayment plan) exceeds 15 percent of the difference between the borrower's AGI and 150 percent of the poverty guideline for the borrower's family size.

The repayment term under IBR can exceed 10 years regardless of the amount of the borrower's loan debt. After 25 years (or 300 payments) in IBR, any remaining balance and accrued interest will be forgiven. As shown in the third example below, depending on the borrower’s circumstances, the monthly payment amount could be $0 — and even those $0 "payments" count toward the required 300 payments.

• Example 1: A single borrower with no dependents, $40,000 in eligible student loan debt at a 6.8% interest rate, and an AGI of $30,000 would have a monthly loan payment of approximately $170 under IBR. Under the standard repayment plan, that borrower’s monthly payment would be about $460.
• Example 2: A married borrower (and no spousal income or spousal student loan debt) with two children, $80,000 in eligible student loan debt at a 6.8% interest rate, and an AGI of $60,000 would have a monthly loan payment of approximately $340 under IBR. Under the standard repayment plan, that borrower’s monthly payment would be about $920.
• Example 3: A borrower who is married with no other dependents, $65,000 in eligible student loan debt at a 6.8% interest rate, and an AGI of $20,000 would have a monthly loan payment of $0 under IBR. Under the standard repayment plan, that borrower’s monthly payment would be about $748.

Why IBR is so important
Now more than ever, with rising student loan debt levels, the current economic climate, and the upcoming transition from two- to three-year cohort default rates, schools are concerned about identifying borrowers at risk for loan default and proactively assisting those borrowers in addressing their difficulties. While it will not be a universal remedy for repayment difficulties, it is clear that IBR can provide enormous relief to borrowers in financial distress and could make the difference in a borrower successfully fulfilling his or her repayment obligations.

Aside from concerns about cohort default rates, if a borrower defaults, his or her credit record is damaged and other consequences may result, such as wage garnishment, collection costs, and ineligibility for additional federal student aid. Although it may be most beneficial for borrowers with high student loan debts and relatively low incomes, IBR will also be an important tool for borrowers in adverse economic circumstances in avoiding default.

More information
Borrowers interested in IBR should be directed to contact their lender for more information and application forms.

IBRinfo.org is a borrower-oriented site provided by the Project on Student Debt that offers a wealth of information about IBR in plain, understandable terms. It also offers an informative, downloadable IBR brochure and a calculator to assist borrowers in determining their eligibility for IBR.

The National Council of Higher Education Loan Programs (NCHELP) has developed a series of general as well as focused training sessions on IBR for school and lender audiences. Recordings of these sessions are available free of charge at this link.

Chansone Durden is an account executive team manager with TG serving schools in MASFAA. You can reach Chansone at (800) 252-9743, ext. 2513, or by e-mail at chansone.durden@tgslc.org. Additional information about TG can be found online at www.tgslc.org.