Could Your Student Loan Payment Be Zero?

Financial IQ

A federal student loan repayment plan based on income is attractive in a not-so-great economy. This is especially true if you are unemployed, or your income is less than in years past. The question is: How do you know if you qualify, and will your payment remain low?

Qualifying for Income-based Repayment

Everything you need to know about the formula for qualifying for income-based repayment (IBR) can be found on this income-based calculator. If your income level changes, or you experience a life change, such as marriage, divorce, or childbirth, you can recalculate your potential payment to see if you qualify for a reduction. Income-based payments change every year based on your current financial situation.

The income -based calculator is used to determine if you can afford to pay off your loans in 10-years. If you can’t afford to repay your student loans in 10 years, your loan payments may land anywhere between zero dollars to a little less than the 10-year payment. If you are on the plan and your income rises, your calculated income-based payment would be higher than the 10-year payment. Thus, you would revert to the 10-year payment plan for that year because your payment is never allowed to exceed the 10-year standard repayment amount. No matter what your payment is, in most circumstances anything you haven’t paid off in 25 years is forgiven. Additionally, individuals working in public service positions may qualify to have their loans forgiven after 120 payments.

What’s the best part of income-based repayment?

Your calculated payment amount is based on your income level, not the amount of the loan.

For example, you are single and you have an adjusted gross income from last year’s tax return of $40,000, you  qualify for a payment of $295. As long as $295 is less than your 10-year repayment amount, you can make this payment regardless of whether your student loan debt totals $40,000 or $140,000. (To learn about couples and income-based repayment, checkout Married Couples and Student Loans.)

Economic Deferment or Forbearance

One of the best benefits of income-based repayment is that if you qualify for economic deferment, a temporary reprieve from payments, your interest is paid for you on your subsidized loans for up to three years, just as if you were still in school. If you choose forbearance due to a situation that doesn’t qualify for economic deferment, such as an emergency home repair, research whether deferment or forbearance is the right choice. If you are considering deferment, make sure you compare your IBR payment options first. A $0 or $5 IBR payment based on your income keeps the 25-year time clock running, and the clock is put on hold for forbearance.


Smaller payments and guaranteed payoff times sound like a dream, so what’s the catch? There are two big drawbacks to income-based repayment: A payment below your interest charges and the potential rise of your payment. How do these drawbacks affect you?

Let’s say that last year you were temporarily unemployed and you qualified for a $0 payment for part of the year. You have $40,000 in unsubsidized loans that accrued interest at 6.8%, which added $2,720 to your loan balance. While your payments will never go above a 10-year standard repayment amount, you may have to pay back this interest if your income rises, which brings us to the second drawback: Your $0 payment might rise to over $480 dollars.

Dividing under lenders

Now let’s say you borrowed federal student loans from three lenders. You owe $5,000 to bank A, $10,000 to bank B, and $10,000 to direct loans. Your monthly IBR payment is $200 ($40 to bank A and $80 to Bank B and $80 to direct loans).

Weighing the Pros and Cons

Income-based repayment is not the only option for paying off your loans. It is wise to compare the income-based payments with federal consolidation loans and standard repayment plans. The good new is: If you change your mind about IBR, you can always switch repayment plans the following year.

Reyna Gobel is a freelance journalist who specializes in financial fitness. She is also the author of Graduation Debt: How To Manage Student Loans and Live Your Life.


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