My Federal Student Loan Balance is Going Up on IBR. What Can I Do?

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Question:

Dear Steve,

Owe approx $150k on an original loan of approx $58k. Been paying steadily while trying to raise a family for years now.

Did an IBR, making approx the same monies and they almost doubled my new payments starting this month.

I don’t feel I can comfortably make these newly adjusted payments.

What options should I pursue? Thanks

Pay

Answer:

Dear Pay,

The various Income-Driven Repayment (IDR) payment programs on federal student loans are a help but increase the debt, as you’ve learned.

You should probably read Why Income-Based Student Loan Payments Can Be a Terrible Trap.

If you want to see what options you have, you can use the Department of Education online calculator.

Regarding IDR options, you can select from the following plans.

Revised Pay As You Earn Repayment Plan (REPAYE Plan)
Pay As You Earn Repayment Plan (PAYE Plan)
Income-Based Repayment Plan (IBR Plan)
Income-Contingent Repayment Plan (ICR Plan)

Generally, your payment amount under an income-driven repayment plan is a percentage of your discretionary income. The percentage is different depending on the plan. The information below shows how payment amounts are determined under each income-driven plan. Depending on your income and family size, you may have no monthly payment at all.

REPAYE Plan

Generally 10 percent of your discretionary income.

PAYE Plan

Generally 10 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount

IBR Plan

Generally 10 percent of your discretionary income if you’re a new borrower on or after July 1, 2014*, but never more than the 10-year Standard Repayment Plan amount

Generally 15 percent of your discretionary income if you’re not a new borrower on or after July 1, 2014, but never more than the 10-year Standard Repayment Plan amount

Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.

ICR Plan

The lesser of the following:

20 percent of your discretionary income or
what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income.

Discretionary Income

The definition of discretionary income trips up many people. The actual number is not what you think it is.

The Department of Education defines discretionary income by saying, “For Income-Based Repayment, Pay As You Earn, and loan rehabilitation, discretionary income is the difference between your annual income and 150 percent of the poverty guideline for your family size and state of residence.

For Income-Contingent Repayment, discretionary income is the difference between your annual income and 100 percent of the poverty guideline for your family size and state of residence.

The poverty guidelines are maintained by the U.S. Department of Health and Human Services and are available at aspe.hhs.gov/poverty-guidelines.”

Reality

Federal loans have IDR options. However, the amount of reduction available is based on a formula. IDR payment plans will always drive your balance higher, and we can cross our fingers that it will be forgiven when you reach the forgiveness age of 20 or 25 years.

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Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.