What payment should be used for a student loan when the borrower is on an Income Based Repayment (IBR) plan?

When a borrower is on an Income Based Repayment (IBR) plan, the appropriate payment to be used for a student loan is typically calculated as a percentage of their discretionary income, not the loan balance. However, when determining qualifying payments for mortgage calculations, particularly for loans like the USDA Rural Housing Loan, lenders often use a standardized approach.

Under USDA guidelines, if the borrower is in an IBR plan, lenders commonly calculate the monthly payment as 1% of the loan balance when the actual payment is lower than this figure or zero. This means that even if the borrower is making a lower payment or no payment at all as permitted under the IBR, the lender will often use this standardized approach of 1% for qualifying purposes to ensure a conservative assessment of debt-to-income ratios.

The rationale behind this approach is to safeguard against future changes in the borrower's financial situation and ensure that debt levels are accounted for comprehensively. Hence, when the borrower is in an IBR plan, using 1% of the loan balance provides a practical measure for evaluating financial stability.