Did you know that you may be able to lower your monthly student loan payment while earning credit toward loan forgiveness? If you are eligible for an income-driven repayment (IDR) plan, your monthly student loan payments will be set based on your income. After paying on your student loans in an income-driven repayment plan for a certain number of years (current plans offer forgiveness after 20-25, and a new plan has been proposed in 2022 that would allow some borrowers to get forgiveness after 10 years), any remaining balance you owe will be forgiven.
Borrowers have experienced a lot of problems with the IDR program in the past, but in April 2022 the Department of Education announced new changes to help fix IDR forgiveness. As part of this fix, the Department will conduct a one-time IDR account adjustment in 2022-2023. Under this adjustment, borrowers with Direct loans or FFEL loans held by the Department of Education may receive significant additional time credited toward IDR forgiveness. The adjustment credit includes time spent in repayment before consolidating loans, time spent in forbearance and deferment, and time in other repayment plans. Most borrowers are expected to have their IDR credit adjusted in July 2023. Borrowers who have already reached enough time in repayment to qualify for cancellation of their outstanding balance under IDR or PSLF once the additional time is credited may receive the credit — and cancellation — as soon as November 2022.
Additionally, the Department announced that it will at long last begin displaying borrowers’ progress toward IDR forgiveness in their individual student aid accounts on studentaid.gov, hopefully in 2023.
IDR and the Covid-19 Payment Pause: For borrowers enrolled in IDR plans, the months spent in the payment pause will count toward IDR loan forgiveness. Additionally, the time to recertify for IDR has been extended due to the payment pause. According to the Department of Education, the earliest borrowers enrolled in IDR might be required to recertify is November 2022. Borrowers should continue to check with their loan servicer and the Department of Education’s website to determine when it will be time to recertify their income. Borrowers can recertify at any time, so those who have experienced a decrease in income may want to recertify sooner to ensure that they have an affordable repayment amount when payments resume. See more information on Covid-19 and IDR on the Department of Education’s website here.
New Changes Coming to IDR: In August 2022, the White House announced plans for a new income-driven repayment plan that will cut borrowers payments in half, or more, on undergraduate loans; cover borrowers’ unpaid monthly interest when their payments are too low to cover the interest they accrue each month so that balances will not increase while in repayment; and shorten the repayment term until forgiveness to 10 years for borrowers who took out $12,000 or less in student loans (which should cover many borrowers who attended community colleges and short-term programs). But this plan has not yet been finalized and is not yet available to borrowers, and many details are still unknown.
The following is a summary of the current IDR program options and terms. Once the new IDR plan and rules are finalized later in 2022 or in early 2023, there may be major changes to these programs.
Different Types of Income-Driven Repayment Options
Income-driven repayment options help many borrowers keep their loan payments affordable with payments set 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 IDR 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.
You may be eligible to have your loans forgiven after making 20 -25 years of payments in an IDR plan, even if your payments were $0 per month. Through 2025, the forgiven amount is not considered taxable for federal taxes and most state taxes. If you live in a state where the forgiven amount will be taxed, you should contact a tax professional to see if you will be required to pay taxes on the forgiven amount. You may be able to avoid paying taxes on the amount if you can show that you are insolvent.
After 2025, unless the law changes, any canceled amount under the IDR forgiveness program 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.
Are Parent PLUS loans eligible for IDR?
Currently, 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.
Which IDR plan is right for me?
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 online) requesting that you get the plan with the lowest monthly payment.
The Department of Education also has a free online tool to help you estimate what your payments would be in various loan plans. You can use this tool to help you figure out which plan is right for you. You can also view NCLC’s chart summarizing the different plans here. 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.
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, after 20 years for borrowers with loans for undergraduate studies and 25 years for borrowers with loans for graduate studies.
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.
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.
Is there loan forgiveness? Yes. If you continue making IBR payments for 25 years, any debt that remains is canceled.
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.
Is there loan forgiveness? Yes. If you continue making ICRP payments for 25 years, any debt that remains is canceled.
Application Process
You may request an IDR plan electronically on Studentaid.gov. 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. You can also request an IDR plan using the Department of Education tool below.
There is a repayment plan selection on this tool that allows you to request the payment plan that provides you with the lowest monthly payment.
You can use this site to apply for IBR, PAYE, REPAYE and/or ICR, complete your annual income documentation requirement (“recertify”), and request a change in your monthly payment due to a change in your income or family size.
Annual Recertification
Again, recertification has been paused due to the pandemic. According to the Department of Education, the earliest borrowers might be required to recertify is November 2022. You can recertify at any time though. If you experienced a decrease in income, you may want to recertify sooner to ensure that you have an affordable repayment amount when payments resume. You can call your servicer with questions about when you need to recertify or check the Department of Education’s website here.
Once repayment begins again, the annual process of recertifying your IDR plan should look like this:
- Under all plans (IBR/ICR/PAYE/REPAYE), borrowers are required to submit updated income documentation annually.
- Borrowers must certify their family size annually, or they will be automatically determined to be a family size of one.
- The recertification 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 (this was not required during the pandemic payment pause).
- 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 loan You can change after making one monthly payment under the standard plan.
Be advised that switching repayment plans has historically meant that the government will add accrued interest to the balance (capitalization). In 2022, the Department of Education proposed to end this practice, but the rule change is not yet final as of September 2022. You should check the rules of your particular plan and check with your servicer to make the decision that is best for you.
