This month a new repayment plan for federal student loans is going into effect that allows borrowers to base their monthly payments on their income after graduation.  Here are some details on how the new Income Based Repayment Plan (IBR) affects loan payments for borrowers, and some pros and cons of participating in the plan.

First of all, this plan only applies to borrowers with federal student loans including Stafford, Grad PLUS or Consolidation loan made under the Direct Loan or FFEL programs.  The loan also cannot be in default and can apply to any type of education.

The monthly amount required is based on income, family size, and state of residence and the Federal Student Aid websites provides an IBR calculator here for you to figure out what monthly amount you would owe.  Borrowers who earn less than the poverty level have a minimum payment of zero, and others do not have to pay more than 15% of their discretionary income. It is possible that your current repayment plan is less than the amount required under the IBR plan.  For example, if you are a single borrower who currently owes $5000 at 6.8% and earns $25,000 a year, the new plan would peg your payments at $109 a month, but the amortized 10 year repayment plan would only require a $57 monthly payment.  In this case it is probably easier to just stick with the original10 year repayment plan.

If a borrower chooses to enroll in the IBR plan because the monthly repayment amount is lower, then the loan may be stretched out due to interest.  Basically, any interest payment not covered by the monthly payment will be rolled into the principal.  So it is possible that the loan will get bigger.  If the borrower has a Subsidized Stafford Loan, the government will pay the unpaid interest for three years. But after that all unpaid interest will be capitalized.

There are a couple ways the loans can be forgiven. One method is for the borrower to make repayment under the plan for 25 years, and the other is to work in public service for 10 years and make all 120 loan payments through the IBR.

The main purpose of the new repayment program is to help many recent graduates who are having trouble finding a job that pays well. It could also help families who have suffered a job loss and have high student loan obligations.  Borrowers will have to record their income and family size every year to redetermine the payment amount. When you get a higher income job, the loan will adjust accordingly.  However, since the loan will be stretched out and interest added, it is not recommended to join the plan if you currently have no trouble paying your current loan amount.

If you could benefit under this program you should contact your student loan lender directly to apply.