About the author: National Consumer Law Center intern Kendra Cobb is a rising third-year law student at Howard University School of Law who is passionate about financial services and economic empowerment. She serves as Vice-President of the Business Law Society and has experience working with the U.S. Securities and Exchange Commission, an estate planning firm, and non-profits that focus on protecting consumers.
Celebrations are in order! This month is the 25th anniversary of the first income-driven repayment (IDR) plan, which means federal student loan borrowers may be eligible for forgiveness of their loans.
What is income-driven repayment (IDR)?
If not in default, borrowers can choose an IDR plan that allows them to pay a percentage of their income toward their student loans. These plans can help many borrowers afford their loan payments, avoid the severe consequences of default, and ultimately, receive loan forgiveness. Many borrowers know of loan forgiveness under the public student loan forgiveness program, but loan forgiveness can also be achieved through IDR plans. In fact, the first group of borrowers to enter and remain in the original IDR plan—income-contingent repayment —since 1994 will be eligible for forgiveness this month.
Each IDR plan has different eligibility requirements that depend on the type of loan, when the loan was taken out, and if the borrower has a partial financial hardship. Each plan also forgives any remaining balance of the borrower’s loans after a period of time of making qualifying payments.
What is a qualifying payment?
Understanding what a qualifying payment is can be tricky, but generally the payment needs to be the right amount and made in the right type of repayment plan.
Borrowers can count the time in the following scenarios toward forgiveness:
- When a borrower is enrolled in any of the IDR plans and makes monthly payments based on their income. This includes payments that are set at $0.00.
- For borrowers in income based repayment or Pay As You Earn plans who no longer have a partial financial hardship and make the required payments in the same amount as the ten-year standard monthly payment plan.
- When a borrower is enrolled in another plan and the monthly payments are equal to or more than the payments required under the standard ten-year plan.
- When a borrower receives an economic hardship deferment, which is limited to three years of qualifying payments (e. 36 monthly payments).
Fortunately, qualifying payments are cumulative and not consecutive. This means that borrowers can stop and then restart payments without losing the number of qualifying payments already made. However, borrowers who consolidate their loans while in an IDR plan will reset the count and will lose the number of qualifying payments already made.
Furthermore, the repayment period must end before the borrower is eligible for forgiveness. Borrowers can overpay or prepay their payments, but cannot qualify for forgiveness faster by doing so. For example, Borrower A has a $25 monthly payment under an IDR plan and four months remaining in their repayment period. If Borrower A prepays $100, then she will get credit for four payments. However, her loans will not be forgiven until those four months have passed.
What is the borrower’s lender or servicer responsible for?
Six months before a borrower meets the requirements for IDR loan forgiveness, the lender or servicer must send the borrower a written notice. The notice must: 1) explain that the borrower is approaching their date to receive loan forgiveness; 2) remind the borrower to make their remaining monthly payments; and 3) explain how the forgiven amount will be taxed.
After the lender or servicer determines that a borrower has satisfied the loan forgiveness requirements under an IDR plan, it forgives the remaining balance and accrued interest on that loan. However, the amount forgiven is taxable, which means the borrower may pay income taxes as if they earned the forgiven balance as income. There are some exceptions to taxation that may apply, such as insolvency—where a borrower’s debts exceed their assets. At a minimum, borrowers should seek advice about potential tax problems and begin saving for any future costs.
What can borrowers do to make sure they receive loan forgiveness?
Forgiveness under an IDR plan is supposed to happen automatically. However, borrowers must be aware and persistent. Borrowers who want to make certain they remain eligible for loan forgiveness under IDR plans should check for the following:
- Confirm that you are in the right repayment plan. This includes knowing what type of loans you have (this can be found in the National Student Loan Data System) and knowing the circumstances of your financial hardship.
- Recertify your income annually and on time. If you fail to submit the recertification request on time, then you risk being switched from your current IDR plan to the standard ten-year repayment plan and could face substantially higher monthly payments. Also, your servicer may be required to capitalize interest on the loan.
- Know what a qualifying payment is and do not rely on your student loan servicer to track the payments properly. Keep a paper trail of all qualifying payments, annual recertifications, and any other communications with your servicer.
By following these practices now, borrowers will be in much better shape and much more likely to receive forgiveness under IDR plans in the future.
Are you approaching forgiveness under an IDR plan? Share your story!