Does the amount you earn on a yearly basis pale in comparison to your monthly student loan payments? Do you have federal student loans? Then you might benefit from setting up an income-based repayment (IBR) plan, income-contingent repayment (ICR) plan, pay as you earn (PAYE) repayment plan or revised pay as you earn (REPAYE) repayment plan.
These repayment programs are only available to those with federal student loans, and they’re collectively referred to as income-driven repayment plans. Setting your federal loans up under an income-driven repayment plan reduces your monthly payment amount because your payment is based on your income and family size. Your payment adjusts annually according to these factors.
Payment amounts are calculated from a percentage of your discretionary income. According to studentaid.ed.gov, for IBR and PAYE, discretionary income is “the difference between your income and 150% of the poverty guideline for your family size and state of residence.” For ICR, it’s 100% of the poverty guideline. (If you’re interested in looking at the poverty guidelines, those can be found here.)
Want to find out how to apply for an income-driven repayment plan? Read on for information on how the process works.
Getting Started With Income-Driven Repayment Plans
Generally, if you want to set your student loan account up with an income-driven repayment plan, your best bet is to first contact your student loan servicer. (Not sure which loan servicer you have? You can check in the National Student Loan Data System.)
If you log into your account online, you should see a section for changing your repayment plan. At the very least, your servicer should address the issue in a FAQ section of its site.
It’s your loan servicers job to help you find the best plan for your situation, but you need to contact them as soon as you know you’re experiencing difficulty in making payments. You don’t want to miss any payments and end up delinquent (or worse, in default) because you couldn’t pay. Plus, loans that are in default aren’t eligible for income-driven repayment plans.
The application process is actually very simple and straightforward.
Income-Driven Repayment Application Process
The first step of the process is to request an income-driven repayment plan. You need to fill out the “Income-Driven Payment Request” form to do that. This can be done online by yourself, or you can apply with a paper application supplied by your student loan servicer.
When you make your request, you have to choose the specific plan you’d like to go with. You can select one yourself, or you can ask your loan servicer to choose the best plan for you. It will choose the one with the lowest monthly payment amount.
Since you’re applying for a repayment plan based on your taxable income, you do need to provide proof of income.
The easiest way to provide proof of your adjusted gross income (AGI) is with your most recent tax return, as long as your income hasn’t changed significantly from the last date you filed. You also need to have filed a federal income tax return for the past two years.
The online application makes it easy to find your AGI. You can just use the IRS Data Retrieval Tool to import your income information.
If you apply with the paper application, you’ll need to supply a paper copy of your most recent federal tax return, or an IRS tax return transcript.
If your income has changed a lot since you last filed, or if you haven’t filed two federal tax returns yet, there are other ways of proving your income.
First, if you don’t have any source of income at all, you just need to indicate that on your application. Only taxable income counts, so if you receive any government assistance or any other income that’s not considered taxable, you don’t need to report it here.
If you do earn an income, you’ll need to provide your most recent pay stubs or other alternative documentation that shows your salary.
Additionally, if you have federal loans with multiple loan servicers, you must request income-driven repayment for each individually. There’s a section of the application that asks if you have eligible loans with more than one servicer, so you can indicate that there.
Wondering how your payments are determined when you owe multiple lenders? First, your income-driven repayment plan amount is calculated. This amount is then multiplied by the percentage of total debt with each servicer.
For example, if you have loans with two servicers, and your income-driven repayment amount is $120, and 50% of your outstanding debt is with Loan Servicer 1, and the other half is with Loan Servicer 2, then you’d have to pay $60 toward each. (50% of $120 is $60.)
The application shouldn’t take very long to complete, but the entire process can take a few weeks depending on which loan servicer you have.
If you have an immediate need to lessen your payments, your loan servicer may apply a forbearance to your federal loans while the process wraps up. That’s why it’s important to contact your servicer as soon as you can’t make your payments.
You Have to Reapply Annually
You’ll be required to submit your proof of income on an annual basis after you apply the first time. As your income changes, so does your payment, so you need to provide this information continuously.
However, there’s no income limit for income-driven repayment plans. If you start earning more, your payment amount is simply capped at the amount you’d be paying under the standard 10-year repayment plan. It will never exceed that amount.
Technically, your loans will still be under your chosen income-driven repayment plan, but your monthly payment is no longer based on your income. You can still have your outstanding loan balance forgiven after your repayment term ends (if you don’t pay your loan off before then).
Who’s Income is Taken Into Consideration?
If you’re married and wondering if your spouses income will be taken into consideration, it depends on how you file your taxes.
Filing separately means only your income and loans will matter.
Filing jointly means your monthly payment will be based off of your joint income.
If you and your spouse file jointly and both have eligible federal student loans, both loans will be taken into consideration, but your spouse doesn’t have to choose to enter into an income-driven repayment plan.
Income-Based Repayment Plan Overview
You don’t qualify for IBR unless your payment amount will be less than what you’re paying under the standard 10-year repayment plan.
A good baseline for determining whether or not you’ll qualify is if your total student loan debt is much higher than your annual discretionary income. If your debt-to-income ratio is really high, you’ll probably qualify.
New borrowers (those that borrowed after July 1st, 2014, and didn’t have any loans outstanding prior to that) have a maximum of 20 years to pay back their loans, while old borrowers (those that had outstanding loan balances after July 1st, 2014) have a maximum of 25 years to pay back their loans.
Pay As You Earn Plan Overview
For PAYE, your monthly payment will be around 10% of your discretionary income, and never more than what you’re paying under the standard 10-year payment plan.
You have a maximum of 20 years to pay back your loans under this plan.
The qualifications for PAYE are the same as IBR - you must be paying less under PAYE than you were under the standard 10-year plan.
However, PAYE is only available to those who were new, first-time borrowers as of October 1st, 2007, and they also must have received a disbursement in the form of a Direct Loan on or after October 1st, 2011.
Income-Contingent Repayment Plan Overview
From studentaid.ed.gov, your monthly payment is the lesser of these two: 20% of your discretionary income, or “what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income.”
Under this plan, you have a maximum of 25 years to pay back your loans. There are actually no initial guidelines you must qualify under - anyone can choose to repay their student loans under this plan.
However, the Federal Student Aid office warns that payments tend to be more expensive under this plan than IBR and PAYE - and possibly even more than the 10-year repayment plan. Make sure you’re going to be paying less if you want to go this route.
Benefits of Income-Driven Repayment Plans
A big bonus for all three of these repayment plans is that your outstanding balance is forgiven after your repayment term is complete. The Federal Student Aid office notes that if you qualify for forgiveness after 10 years through the Public Service Loan Forgiveness program, that takes precedence.
How can you still have an outstanding balance at the end of your repayment period? The monthly amount you owe will fluctuate with your income. You could end up repaying your loans before your term is up, or you could end up with a balance.
Under IBR and PAYE, if your monthly payment isn’t enough to cover any interest that accrues monthly on your subsidized loan, the government will pay the difference for the first three years. So if $30 in interest accrues every month, and your monthly payment under IBR and PAYE only pays for $15 of that, the government will cover the other $15.
You might want to use the estimated repayment calculator to see which plans offer you the lowest monthly payment. Income-driven plans aren’t guaranteed to give you the lowest monthly payment - all situations are different. There are still other repayment plans that aren’t reliant upon your income that could lower your monthly payment, such as the graduated or extended repayment plans.
Check With Your Loan Servicer First
Before applying for an income-driven repayment plan, it’s best to check with your loan servicer to get its input. You don’t want to end up owing more per month than you do now. These repayment plans are designed to help you, not hurt you. You may find that forbearance or deferment is a better option for you, especially if you’re only experiencing a temporary economic hardship.