Income Driven Repayment Options

Different Types of Income-Driven Repayment Options

Income-driven repayment options help many borrowers keep their loan payments affordable with payment caps based on their income and family size. There are a number of income-driven repayment (IDR) plans:  Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE) and Income Contingent Repayment (ICR). Eligibility for each program depends on the type of loan and often when the loan was taken out.

After the initial calculation, your payment may be adjusted each year based on changes in income and family size.  You will have to verify your income every year.  If you are in default, you must first get out of default in order to select an income-driven repayment plan.

You can choose to make higher payments if you can afford it while you are in an IDR plan.  You might want to do this to try to pay off the principal sooner.  You should tell your servicer in writing, along with the loan payment, that you want the extra money to be applied to the loan principal.  Be sure to follow up to make sure that the payment was applied properly. Payments under these plans can be very low, sometimes 0. This means that it will usually take more time to pay off your loans, but this is better than going into default and facing the government’s powerful collection tools.

Parent PLUS borrowers are not eligible for any of the IDR plans.  However, parent PLUS borrowers can consolidate the PLUS loans and then choose ICR for the new Direct Consolidation loan.

It can be very confusing to figure out which plan is best for you.  If you prefer, you can check a box on the income-driven repayment plan request form (or on-line) requesting that you get the plan with the lowest monthly payment. The Department has a web site with information about all of the income driven repayment plans.  The Institute for College Access and Success (TICAS) created a summary chart to help borrowers understand the various income-driven repayment plans. There are pros and cons to the different plans that vary depending on individual circumstances.

The summary below starts with the most broadly available plan (REPAYE).  The list is not necessarily in order of the best plans.  Figuring out which plan is best is an individualized decision that each borrower must make.

Revised Pay As You Earn (REPAYE)

REPAYE,  the newest income-driven plan became available on December 17, 2015.

Who is eligible?:  All Direct Loan borrowers (except for parent PLUS borrowers) can apply regardless of when you took out the loans.  There is no requirement to show a partial financial hardship in order to qualify.

What is the payment amount?  The payment amount is determined based on adjusted gross income.  Payments are capped at 10% of discretionary income.  (This is defined as adjusted gross income above 150% of the relevant poverty level income divided by 12).   You must renew eligibility every year.  Under this plan, there is no limit (or cap) on the monthly payment.  This means that higher income borrowers could end up with payments even higher than the standard ten year plan. Borrowers can always switch to a different plan if they prefer.

How does the formula work for married borrowers?  Your spouse’s income is included in calculating monthly payments even if you file separate tax returns.  However, a borrower may request that only his/her income be included if the borrower certifies that s/he is separated from his/her spouse or is unable to reasonably access the spouse’s income information.  (See Section 4 of the IDR application and recertification form).

What happens if a borrower fails to re-certify?  If you fail to provide income documentation within ten days of the servicer’s deadline and the Department cannot determine your new monthly payment before the end of the annual payment period, you will likely be removed from the REPAYE plan and placed in an alternative repayment plan.  You can return to REPAYE by providing the documentation and by making any required REPAYE  payments that were owed during the time you were on the alternative payment plan.

Is there loan forgiveness?  Yes, twenty years for borrowers with loans for undergraduate studies and 25 years for borrowers with loans for graduate studies.  This canceled amount will be taxed as income.   However, you may not have to pay taxes even if the forgiven amount is considered taxable income.  For example, you may be able to claim insolvency status using I.R.S. Form 982.  It is a good idea to consult a tax professional for more information.

Pay As You Earn (PAYE) 

The “Pay As You Earn” Repayment Plan became available on December 21, 2012.   In general, it is more favorable for borrowers than REPAYE, but only Direct Loan borrowers that took out loans during certain time periods qualify.

Who is eligible?  Only certain Direct Loan borrowers qualify, including all Direct Loan borrowers taking out loans July 1, 2014 or later.

What is the payment amount?  The payment amount is determined based on  adjusted gross income.  Payments are capped at 10% of discretionary income.  You must renew eligibility each year.

How does the formula work for married borrowers?  For a married borrower filing jointly, both the borrower’s and spouse’s income will be included in the calculation.  For a married borrower filing separately, only the borrower’s income will be included.

Is there loan forgiveness?  Yes, after 20 years of repayment.  This canceled amount will be taxed as income.   However, you may not have to pay taxes even if the forgiven amount is considered taxable income.  For example, you may be able to claim insolvency status using I.R.S. Form 982.  It is a good idea to consult a tax professional for more information.

Income Based Repayment (IBR)

IBR is available for both FFEL and Direct Loan borrowers.  IBR will generally be less favorable for borrowers than REPAYE or PAYE.  However, it is the only income-driven repayment plan available to FFEL borrowers.  If you have a FFEL loan and want an income-driven plan other than IBR, you will have to consolidate your loans into the Direct Loan program and then choose between the range of Direct Loan IDR plans.

IBR is similar to the PAYE plan in that your payment is based on adjusted gross income.

You can stay in IBR even if you no longer qualify because of increases in your income.  If this happens, your payments will be no more than the 10 year standard monthly payment amount, based on the balance you owed when you first entered the IBR repayment plan.  Your repayment period may be longer than 10 years, but any interest that has accrued will be capitalized (added to the loan balance).

If you are married and both you and your spouse have student loans, the IBR formula considers you and your spouse’s joint federal student loan debt as well as your joint income if you file taxes jointly.   If you are married, but file income taxes separately, only your income will be counted in determining the IBR repayment amount.  However, you may lose certain tax benefits by filing separately.  You should consult a tax professional if you are considering this.

Under both IBR and PAYE, if a borrower fails to provide income documentation within ten days of the servicer’s deadline, the borrower is treated as if the borrower no longer has a partial financial hardship and payments are set to the amount the borrower would have paid under a standard plan. Unpaid accrued interest will be added to the loan balance. In these circumstances, borrowers can get back into IBR or PAYE by submitting income documentation and can request forbearance while the repayment amount is recalculated.

If you continue making IBR payments for 25 years, any debt that remains is canceled.   This canceled amount will be taxed as income.   However, you may not have to pay taxes even if the forgiven amount is considered taxable income.  For example, you may be able to claim insolvency status using I.R.S. Form 982.  It is a good idea to consult a tax professional for more information.

Direct Loan Income Contingent Repayment (ICR)

The ICRP is available only in the Direct Loan Program, including the Direct Loan consolidation program.  The required payment can be no greater than 20% of any earnings above the poverty level. The Department has a repayment estimator to help you estimate payments amounts under ICR and other payment plans.  If you are married and file taxes jointly, your  joint income will be counted in figuring out the ICR repayment amount.

Parent PLUS loans are not eligible to be repaid under ICR (or IBR or PAYE).  However, parent PLUS borrowers can consolidate the PLUS loans and then choose ICR for the new Direct Consolidation loan.

If you continue making ICRP payments for 25 years, any debt that remains is canceled. This canceled amount will be taxed as income.  However, you may not have to pay taxes even if the forgiven amount is considered taxable income.  For example, you may be able to claim insolveny status using I.R.S. Form 982.  It is a good idea to a tax adviser or professional for more information about possible tax consequences.

APPLICATION PROCESS AND ANNUAL RECERTIFICATION

You may request an IDR plan electronically on the StudentLoans.gov Web site.   Using this site, you will enter your personal information into the Electronic Application, authorize a transfer of tax information using the IRS Data Retrieval Tool, and review, electronically sign and submit the completed form online.

There is a repayment plan selection form (and on-line) that allows you to request the payment plan that provides you with the lowest monthly payment.

You should be able to use this site to initially apply for IBR, PAYE, REPAYE and/or ICR, meet the annual income documentation requirement, and request recalculation of your monthly payment due to a change in circumstances.

The annual process of recertifying IBR/ICR/PAYE/REPAYE should look like this:

• Under all plans, borrowers are required to submit updated income documentation annually
• Borrowers must annually certify their family size or a family size of one will be used
• The reevaluation date is based on when the borrower initially entered the plan (anniversary date)
• Servicers must require borrowers to submit annual income documentation no more than thirty-five days before the anniversary date
• Borrowers whose loans are serviced by Department of Education servicers or who have FFEL loans serviced by Department of Education servicers can use the electronic application to recertify their income and family size
• Borrowers will receive notice that they must submit income and family size information/documentation and the consequences of not doing so.  Notices will be sent no earlier than 90 days and no later than 60 days prior to the annual deadline.
• Borrowers submitting income documentation within 10 days of the deadline will have their current payment amount maintained until income documentation is processed and a new payment amount is calculated.
• If the borrower provides the documentation within 10 days of the deadline, the loan holder’s inability to determine a borrower’s new payment amount by the borrower’s anniversary date should not result in automatically increased payment amounts and capitalization of all outstanding interest.
• In addition to the annual review process, under IBR, PAYE, and REPAYE borrowers may request at any time that their loan servicer recalculate their payment amount if the borrower’s financial circumstances have changed and the income amount that was used to calculate the borrower’s current monthly payment no longer reflects the borrower’s current income. This resets the annual payment period.
• You may request at any time that your servicer recalculate your payment amount if your financial circumstances have changed. This resets the annual payment period.

Leaving Income Driven Repayment

You may remain in these plans regardless of whether you maintain a partial financial hardship. The rules are different depending on the type of plan. For REPAYE, for example, it never matters whether you have a partial financial hardship. You can leave the PAYE or REPAYE plans at any time if you want to switch. If you leave IBR, you must repay under a standard plan. However, you do not have to stay in the standard plan for the life of the life. You can change after making one monthly payment under the standard plan. Be advised that switching repayment plans usually means that the government will add accrued interest to the balance. You should check the rules of your particular plan and check with your servicer to make the decision that is best for you.