Tutorial: Calculating Monthly Loan Payments Under Income-Based Repayment
The monthly loan payment under income-based repayment (IBR) is based on the borrower’s income and the poverty line for the borrower’s family size. It will change each year based on the borrower’s income during the past year and changes in the family size.
Calculate the monthly loan payment as follows:
Example (Income-Based Repayment)
Calculate the appropriate poverty line based on the family size and state of residence (e.g., continental U.S., Alaska or Hawaii). A child or dependent is counted in family size if the borrower (and his/her spouse, if applicable) provides more than half support to the child or dependent, not whether the child or dependent is claimed as an exemption on the borrower’s federal income tax returns. Don’t forget to count the borrower’s spouse if the borrower is married.
Assume that the borrower is unmarried without any dependents, yielding a family size of 1. The poverty line for a family size of 1 in the continental U.S. was $11,490 in 2013.
Multiply the poverty line by the appropriate percentage, 150% for income-based repayment.
Assuming income-based repayment, multiply $11,490 by 150% to obtain $17,235
Subtract this figure from the borrower’s adjusted gross income (AGI). If the borrower is married, use the borrower’s AGI if the borrower files a separate federal income tax return and the joint income if the borrower files federal income-tax returns as married filing jointly. This yields the borrower’s discretionary income.
If the borrower has an AGI of $30,000, subtracting 150% of the poverty line ($17,235) yields $12,765.
Multiply the difference by the appropriate percentage of discretionary income: 15% for IBR. This yields the annual payment.
Multiplying $12,765 by 15% for IBR yields $1,914.75.
Divide the result by 12 to obtain the monthly payment amount.
Dividing $1,914.75 by 12 yields a monthly payment of $159.56.
If the monthly payment is less than $5, set the monthly payment to zero. (A monthly payment of zero according to the repayment plan formula still counts as a payment for loan forgiveness purposes. A monthly payment of zero occurs when the AGI is less than 150% of the poverty line.) If the monthly payment is $5 to $10, set the monthly payment to $10.
Since the monthly payment is more than $10, it remains at $159.56.
Compare the monthly payment with the standard 10-year repayment amount. If the monthly payment is lower, the borrower has a partial financial hardship and qualifies for the income-based repayment plan. (The monthly payment under IBR functions as a cap.)
The borrower’s debt of $30,000 at 6.8% interest yields a monthly payment of $345.24. Since this is greater than $159.56, the borrower qualifies for income-based repayment with a monthly payment of $159.56.
This calculation is repeated annually.
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