Changes to Federal Student Loan Income-Based Repayment Plan

Recently, President Obama bypassed Congress and enacted an executive order that will make some changes to the federal student loan income-based repayment (IBR) options. This news makes some people happy and disappoints others. Here are the details:

You should know that this is only an expansion of changes that were made back in 2007. Under the current rules, eligible individuals only needed to pay 15% of their adjusted gross income (AGI) above the poverty line each month. Additionally, after 25 years (under the repayment plan), the loan could be completely forgiven. So, if you started with IBR in 2007, your loans would be completely forgiven in 2032.

Below is the chart showing the maximum payment you would need to make each month under the current plan:

Income Based Federal Student Loan Repayment

Federal Student Loan Income-Based Repayment

Under Obama’s executive order, the whole thing gets a new marketing slogan: “pay as you earn”, repayment percentage will drop to 10% of AGI beginning in 2012, and the total forgiveness drops to just 20 years (again, this starts when you join the program). So, if you started with IBR in 2007, then your loans will be completely forgiven in 2027. The new plan also has a consolidation option that gets going in 2012 for those with eligible loans.

Obviously for those people in a low paying job (either by choice or not), this is welcome news. This will lower some student loan payments by $100 month. Mainly for those with high debt and really low income (e.g. the guy working at McDonalds who has a degree from George Washington). But on average, this new plan will reduce payments by much less per month. This can assist these people for a long time though – up to 20 years. And, right or wrong, can eventually free them of the obligation entirely.

This program, like many federal aid programs, picks the winners (in this case, the recent graduates with a lot in student loans and a low income) and leaves the rest of us, who’ve done it “the old-fashioned way”, feeling like losers. What bites the most is that people who fall into this category are taxpayers, who essentially start footing the bill for the bailed out group. The President says this won’t cost the taxpayers, but I cannot fathom that since both interest and principal are being subsidized.

Is this good for the cost of education (i.e. the real problem)? This does nothing to help slow down the cost of rising education. In fact, I think it makes it worse. Grants, State-funded scholarships, easily accessible subsidized loans, and now subsidized loan repayment plans help to make the actual cost of going to college more irrelevant. What happens when you make price irrelevant? Just ask anyone who’s ever looked at a medical bill or anyone who’s ever paid for a wedding.

What do you think of the changes?

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Last Edited: October 27, 2011 @ 1:11 pmThe content of is for general information purposes only and does not constitute professional advice. Visitors to should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.
About Philip Taylor

Philip Taylor, aka "PT", is a CPA, financial writer, podcaster, FinCon Founder, husband, and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or Google+. Listen to the new podcast, Masters of Money!


  1. From Dad – have you seen this; not sure if it will apply to you.

    • Caleb’s Dad, you’ll have to use the @ button above in the “share the knowledge” section to email this to Caleb. This was just the comment box. Thanks for sharing!

  2. Jenna, Adaptu Community Manager says:

    How does one join the program?

  3. I share the same fear that you do…this is going to do NOTHING to curb the cost of eduction it seems like sort of just putting gas on a fire to put it out because it is liquid.

  4. The Family CEO says:

    All of these measures are well-intentioned, but they all have unintended consequences. I don’t think the federal government belongs in student loans at all.