What Is the Difference Between IDR and IBR?
Make sense of federal student loan repayment. Explore how income-based plans adapt to your financial situation and understand their critical distinctions.
Federal student loans can present a significant financial challenge. Income-driven repayment (IDR) plans offer a structured solution, adjusting monthly payments based on a borrower’s financial situation. These plans aim to make payments more affordable and prevent loan defaults when income is low.
Income-Driven Repayment Overview
Income-driven repayment (IDR) is a category of federal student loan repayment plans that ties your monthly payment amount directly to your income and family size. This approach makes loan payments more manageable, especially during periods of lower earnings. A core principle across all IDR plans is “discretionary income,” which is the difference between your adjusted gross income (AGI) and a percentage of the federal poverty guideline for your household size.
IDR plans generally offer potential loan forgiveness of any remaining balance after a specified number of years in repayment. To maintain enrollment and ensure correct payment calculations, borrowers must recertify their income and family size annually. This yearly review ensures payments accurately reflect current financial circumstances.
Income-Based Repayment Details
Income-Based Repayment (IBR) is a specific type of income-driven repayment plan. To qualify for IBR, borrowers must demonstrate a “partial financial hardship,” meaning their calculated IBR payment would be less than what they would owe under the 10-year Standard Repayment Plan.
Under IBR, monthly payments are typically 10% or 15% of your discretionary income. The specific percentage depends on when you first borrowed your loans: 10% applies to new borrowers on or after July 1, 2014, while 15% applies to those who borrowed before that date. Your IBR payment will never exceed the amount you would pay under the 10-year Standard Repayment Plan.
Unpaid interest under IBR is added to your loan principal if you no longer have a partial financial hardship or leave the plan. Any remaining loan balance is forgiven after 20 or 25 years of qualifying payments. The 20-year timeline applies to new borrowers on or after July 1, 2014, and 25 years for those who borrowed earlier. IBR is available for Direct Subsidized and Unsubsidized Loans, Grad PLUS loans, and most FFEL Program loans, notably being the only IDR plan generally available for FFEL loans without consolidation.
Key Distinctions Among IDR Plans
Other income-driven plans include Pay As You Earn (PAYE), Income-Contingent Repayment (ICR), and the Saving on a Valuable Education (SAVE) Plan. These plans offer different features, particularly in how discretionary income is calculated. For IBR and PAYE, it’s your Adjusted Gross Income (AGI) minus 150% of the poverty guideline. For ICR, it’s AGI minus 100%. The SAVE Plan uses a more generous calculation, subtracting 225% of the poverty guideline from your AGI, which can result in lower payments.
The percentage of discretionary income used for payment calculation also differs. PAYE generally sets payments at 10% of discretionary income, similar to IBR for newer borrowers. The SAVE Plan also typically uses 10% of discretionary income, though it is transitioning to 5% for undergraduate loans. In contrast, ICR payments are calculated at 20% of discretionary income.
A key distinction is the payment cap. IBR and PAYE cap monthly payments so they never exceed what you would pay under the 10-year Standard Repayment Plan. However, the SAVE Plan and ICR do not have this payment cap, meaning your monthly payments could increase indefinitely with your income.
Interest subsidy rules also vary. Under IBR and PAYE, the government covers 100% of unpaid accrued interest on subsidized loans for up to three consecutive years if your payment does not cover it. The SAVE Plan offers more robust interest subsidies, preventing unpaid interest from growing your loan balance as long as you make your calculated monthly payment. ICR does not provide any interest subsidy.
The treatment of spousal income depends on the plan and tax filing status. For IBR, PAYE, and ICR, if you file federal income taxes separately from your spouse, only your income is typically considered. The SAVE Plan generally includes spousal income regardless of whether you file jointly or separately. Forgiveness timelines also vary, with IBR and ICR typically offering forgiveness after 20 or 25 years, while PAYE generally provides forgiveness after 20 years.
Navigating Your Repayment Options
Choosing an income-driven repayment plan involves assessing several personal financial factors. The types of federal student loans you hold and their origination dates determine eligibility for specific plans. Some plans are only available for Direct Loans, while IBR uniquely accommodates Federal Family Education Loan (FFEL) Program loans.
Your current income and future earning potential play a role in determining your monthly payment and overall repayment cost. A lower income can make an IDR plan beneficial, potentially leading to lower or even $0 payments. Your family size also impacts the calculation of discretionary income, affecting your monthly payment amount.
The total loan balance should be considered, as a higher balance might make interest subsidies or loan forgiveness more impactful. Any forgiven balance at the end of the repayment period may be considered taxable income by the Internal Revenue Service (IRS). Regularly recertifying your income and family size each year is necessary to remain on an IDR plan and ensure accurate payments.