Income-based repayment is a new federal student loan repayment opportunity for students graduating with a large amount of debt and a small income. Income-based repayment helps borrowers keep their loan payments affordable with payment caps based on their income and family size. This plan is particularly beneficial for people graduating from expensive graduate programs, like medical or law school, who could have loan debt of $100,000 or more. It can also help anyone who graduates into a poor job market.

In order to enroll in income-based repayment you have to qualify by demonstrating financial hardship. The good news is that it is not hard to qualify. A borrower is eligible for IBR if the total initial standard monthly payments for Stafford, Grad PLUS and Federal Consolidation Loans in repayment exceed 15% of the borrower’s discretionary income. What is discretionary income? It is the borrower’s adjusted gross income minus the poverty guideline (which is $16,245 this year). The borrower’s initial IBR payment would then be 1/12 of 15% of their discretionary income.

Under the IBR plan a borrower’s financial situation is reassessed every twelve months. The borrower is responsible for submitting their information every year and based on changes in income and family size their payments will increase or decrease accordingly. However, when a person applies for IBR a monthly payment cap is determined and while enrolled in IBR their monthly payment will never exceed this cap. A borrower can also leave IBR at any time, but once again the borrower is responsible for making the phone call to say they want to withdraw.

One of the huge benefits of IBR is that after 25 years of strict monthly payments whatever a borrower has left to pay is forgiven. If a borrower does not have a job right after they graduate, and therefore has an income of zero, they can still enroll in IBR. Fortunately, within the IBR plan a zero-dollar payment counts towards the 300-payment limit and the 120-payment public service loan forgiveness clock.

The key to getting the most out of IBR is discipline and documentation. Borrowers need to have clear proof of their income, family size and marital status. They need to be disciplined enough to submit their information every year in order to avoid having to make their maximum payment. Also if a borrower wants to be eligible for public service loan forgiveness after ten years they need to keep documentation as proof of their work for an eligible organization.

Does this plan sound like a good deal? On Monday check back to see specific IBR situations and learn what the plan might be able to do for you.