Hey there—so glad I discovered this site.

So I am trying to figure out if my son would be wise to look at an IBR program (and if so, which one—I know there are some newer options). I am hardly what would be called a helicopter parent—my son handles most of his own financial things—but I told him I would deal with the loan stuff because I wanted to help cover some of it for him (my graduation gift, if you will—he worked very hard through college and grad school to help pay for school and I didn’t have as much money at the time to help him).

So here’s the scenario—he just finished grad school and has about $71,000 in loans (subsidized and unsubsidized) from grad and undergrad total. He has a job he’s about to start, but it doesn’t pay tremendously—about $36,000. He’s in a field where I think it’s reasonable to assume he will see steady bumps in pay. I don’t think it’s out of line to imagine he might double his salary within 5-10 years—and maybe triple within 10-15. So I’m anticipating that he will eventually have too much income to qualify for the lower IBR-adjusted loan payment, but I gather he’d still be in an IBR program and would just have to pay off the loan at the maximum payment level (which, in his case, would be about $820 a month).

My questions:

1) Does IBR or its many variations make sense for him? (And again, which version of it?) Or would he just be better going off with standard? (I hate seeing us pay a ton more in interest just because of the appeal of a lower upfront payment or a loan forgiveness at the end.)

2) How would it work if he had to start paying the maximum—would it just eat away at the loan until he paid it off even if that’s before the loan forgiveness term of 20 (or whatever) years? And if that’s the case, I guess there would be no loan forgiveness, correct?

3) Let’s say he does IBR but he really hits it big financially (or I do—though not likely, but I can dream!): Can he still just pay off loan completely at any time? Or would anything prevent that? (I understand if he pays off early, he’d lose loan forgiveness.)

I understand that he’d start with a much lower loan payment to begin with—his adjusted gross income for last year is under $10,000 (and I assume they base initial payments on last year’s AGI, even if he’s about to start his first real job, but tell me if I’m wrong). So I know there’s an initial advantage to do IBR. I’m just wondering if it could actually cost a lot more in the long term with the scenario I outlined above.

Is his new job in public service? If so, he may also want to think about Public Service Loan Forgiveness.

1. I guess that depends. I would think that it would make sense to be on IBR, because you can always pay more than what you owe per month if you had the money, but if you did not at least you know the amount that is owed won’t be greater than 15% of your income. You do have to supply paperwork every year to prove that you have a financial hardship however, and if you forget to file the paperwork you have to pay what you would under the standard 10 year plan. Not all loans are eligible for IBR, though, so you’ll want to check that they qualify. Also, choose IBR over ICR. the stupid calculators in the government websites might show ICR as having a lower payment, but it’s only calculating the payment for the loans that qualify (without indicating that to you)

2. By maximum do you mean a standard 10 year repayment? Well, if you choose that plan you will be paid off in 10 years. Paying more at the beginning means paying much less interest over the long run.

3. yes, there is nothing that can stop you from paying off your debt if you have the ability to do so. You can always pay more. Just realize that paying more than your monthly bill will make your account “paid ahead” and if you decide to try to do the 10 year public service forgiveness program, it causes issues because the program counts the number of on-time payments made only. Let’s say you make a large payment that would total about 4 months of payments…you would only get credit for your initial payment, and not for the other three months. This only applies to the 10 year loan forgiveness program though, and not the 25 year program. There might be a way to pay more towards your balance and not have your account go into a “paid ahead” status, but that would require you to work it out with your loan servicer (and knowing their track record, they will probably mess it up!)

I think the 10 year forgiveness program is best if you have a high loan debt, because it is tax free. The only catch is you have to qualify for it. The forgiveness after 25 year is not tax free (although that might change) which means if you have $100,000 forgiven, you’ll have to claim it on your income and the IRS will want probably a good third of it due immediately. Both programs are not 100% guaranteed though, so if you have the option to pay them off that will be safest. If you have a high loan debt that would be impossible to pay off in 10 years, then see if the Public service loan forgiveness program is an option.