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KEY TAKEAWAYS
- Thousands of high-income student loan borrowers are being blocked from switching to the Income-Based Repayment (IBR) plan, preventing them from qualifying for tax-free loan forgiveness.
- If processing delays are not rectified, these borrowers may not be able to have their loans discharged before the tax-free deadline expires at the end of the year.
Some student loan borrowers are being blocked from switching to a federal repayment plan that would help them get tax-free loan forgiveness before the end of the year.
Many borrowers are seeking to transition into the Income-Based Repayment plan, in which they may be eligible for student loan forgiveness before the end of the year. Those who become eligible for loan discharge in 2025, typically after making 20 or 25 years of qualifying payments, do not have to pay taxes on their loan forgiveness.
The problem is that the Department of Education and loan servicers are holding the IBR transfer applications for some borrowers rather than processing them, making it impossible for many to become eligible for forgiveness this year. Forgiveness for those who reach eligibility after 2025 will be treated as taxable income.
Scrambling To Switch Plans
Millions of borrowers on the Saving for a Valuable Education repayment plan remain in forbearance, which prevents them from making payments that would qualify them for loan forgiveness.
Some of these borrowers have already met the payment requirement for forgiveness or are one to two payments away from doing so. However, borrowers on SAVE are ineligible for forgiveness, so they must transfer to IBR, Pay as You Earn, or Income-Contingent Repayment to finish their payments.
The IBR plan has been the primary plan that SAVE plan borrowers have transitioned to, as it generally offers more affordable payments than other plans and is the most stable option for the future, since the others will be phased out.
However, there’s a significant hiccup preventing many SAVE plan borrowers from switching to the IBR plan: an income requirement scheduled to be phased out has still not been removed.
Why This Matters To Borrowers
Millions of student loan borrowers could face a significant tax bill in the next couple of years if they don’t have their loans discharged before the end of 2025, when a tax break expires.
Why Some Borrowers Are Unable To Access IBR
A partial financial hardship requirement in the IBR plan requires the applicant’s payments to be lower than they would be under a standard 10-year repayment plan. That means that borrowers with high incomes or low loan amounts are typically rejected from IBR.
A provision in the “One Big, Beautiful Bill” required the Department of Education to allow borrowers to switch to the Income-Based Repayment plan starting July 4, even if they do not meet the partial financial hardship requirement.
However, student loan servicers continued to reject applicants who did not meet this requirement for months after that.
In October, the Department of Education affirmed in a court filing that it would not deny borrowers who did not meet the partial financial hardship requirement. It also said borrowers who applied for IBR on or after July 4 but were rejected due to the requirement would be invited to reapply.
Yet, the department has not provided any updates on when it will begin processing applications for these borrowers. When Investopedia reached out to spokespeople from the Department of Education, it directed borrowers to its website, which says system changes to implement the updates to IBR will be completed in winter 2025.
Why Is Access to This Repayment Plan Important?
The IBR plan remains the most affordable income-driven repayment plan for many SAVE borrowers seeking to make progress toward loan forgiveness.
Borrowers who do not meet the partial financial hardship requirement are not eligible to enter into the PAYE plan. The ICR plan does not require partial financial hardship and provides loan forgiveness for borrowers after 25 years of qualifying payments. However, payments under the ICR plan are generally more expensive than those under the IBR plan.
| The Differences Between The IBR and ICR Plan | ||
|---|---|---|
| Repayment Plan | % of Discretionary Income Used to Calculate Payment Amounts | Time Until Loan Forgiveness Is Granted |
| IBR Plan (for borrowers who first took out loans after July 1, 2014) | 10% | 20 years |
| IBR Plan (for borrowers who borrowed before July 1, 2014) | 15% | 25 years |
| ICR Plan | 20% | 25 years |
IBR payments are capped at what the borrower would pay under a 10-year standard plan. This is particularly important for borrowers who do not meet the partial financial hardship criteria, as their payments, calculated based on their income, will generally be very high.
SAVE borrowers who do not meet the partial financial hardship requirement and are looking to complete their payments before the loan forgiveness tax rule ends will either have to make high payments on ICR or hope they will be accepted into IBR in time.
