Student loan borrowers using Income-Driven Repayment (IDR) methods have an annual income recertification requirement. Due to the multiple national forbearance extensions, many borrowers may be unaware of their recertification date. PayForED lists student loan solutions and updated rules regarding the new IDR recertification dates due to the COVID Extensions.
The major cause of this confusion is the national forbearance process has extended the non-payment and zero interest rates multiple times. These payment extensions do not match up directly to the recertification dates that an IDR user usually faces. The CARES Act originally extended the annual IDR recertification for 12 months. Due to the Biden administration change, the maximum recertification extension is now 20 months from a borrower’s original recertification anniversary date. This additional extension will depend on which action the borrower took during the national forbearance period.
Importance of Managing Income for IDR Recertification
Before reviewing recertification timing, borrowers must realize how important their tax filing status and proper management of their Adjusted Gross Income (AGI) is to their IDR monthly payment amount. A borrower’s IDR monthly payment is based on the income reported on their most recent tax return and is available in the IRS database.
Due to the various extensions, a borrower’s 2020 tax return will be critical in managing their new repayment starting October 1 and the timing of their recertification date. This is especially true for people who got married, divorced, or had major income changes.
People Who Did Not Do Recertify During Extensions
For those borrowers who did not recertify during the entire national forbearance period, your new date will be changing. In the IDR Recertification Date Chart below you need to locate your current IDR recertification month. In the next column is your new IDR Recertification date due to the Biden administration change.
New IDR Recertification Date Chart Due to COVID
If an IDR borrower’s prior original recertification date were May 2020 then the borrower would be required to recertify on that date. However, for this example, he or she did not. Due to the new extension, their new anniversary date will be extended to 1/1/2022 and the person will be using their 2020 taxes to determine their new IDR monthly payment amount. Future recertification will be on 1/1 of each year going forward.
People who Did IDR Recertification During Extensions
People who did recertify on their renewal date during the national forbearance will have 2 options to select from. The first option is to delay your recertification. The second option is to stay on your annual recertification date. This could be a difficult decision and you will need to run your numbers to calculate what will happen when payment restarts in October 2021.
Take Advantage of Recertification Extensions
If you had recertified on your original renewal date, you will be facing another recertification again without making any payments. By taking advantage of the recertification extension, you will have a new recertification date based on the New IDR Recertification Chart above.
By taking advantage of this opportunity your October 2021 monthly IDR payment will be using the income amount reported on that recertification. However, It is important to compare your new date and the income that will be used in calculating the new IDR payment.
A borrower had a recertification date of May 2020. They most likely used their 2018 taxes to complete their IDR recertification. This borrower opts to delay their May 2021 recertification and use the extension. Their new recertification date will become January 2022 and stay January going forward. For the new extended recertification, the borrower will most likely be using their 2020 income which could result in a significant IDR payment increase since it is a two-year change in income.
Stayed the Course with Annual Recertification
For the borrower who did their recertification during the first extension and completes their second recertification during the current extension, you will keep your original date going forward. This borrower did not use the recertification extension but benefited from the non-payment, zero interest rates, and loan forgiveness credits.
For this example, the IDR borrower’s prior recertification date was 5/1/2020 then the borrower would be required to recertify on 5/1/2021. The IDR borrower’s new recertification anniversary date would then be May 1, 2022.
By using this strategy, you minimize the risk of a significant increase in your IDR payment in most cases.
New IDR Users
The borrower’s advantage to using the federal loan repayment methods is the flexibility. As COVID has impacted many people’s income, some have converted to using an IDR method to better manage the monthly payment. Using one of the IDR methods is a great way to make minimal payment and avoid forbearance or default. For most, your recertification date will remain the same since your recertification date is after the original extension. The annual recertification date is established once your IDR application is approved.
Penalty for Not Recertifying
All these extensions and changes have made a complex process even more confusing. It is critical for the borrower who is using an IDR method to know when to recertify. The penalties for not properly recertifying could be severe depending on the IDR method that the borrower is enrolled in.
Here are the most common penalties that a person could face:
- Student interest capitalized (Increase loan balance amount)
- Loss of loan forgiveness months credit while not enrolled in an IDR method.
- Minimum 1 month of the 10-year standard payment amount before IDR re-enrollment
- Re-enrollment may take additional time.
Reviewing IDR Payment Amount
A common misunderstanding of the IDR methods is that this repayment amount is like a car loan or mortgage. It is not. An Income-Driven Repayment (IDR) amount is based on the person’s income and not the terms of the loan.
A car or mortgage has loan terms such as interest rate, loan balance, and interest calculation. Each payment has a portion being paid to interest and the loan balance. With an IDR payment, this amount may not cover the entire student loan interest.
Many IDR users become confused given that they are making my monthly payment, but their loan balance keeps on going up. The explanation is simple; the IDR payment is not always paying the amount of loan interest being charged to the loan. This results in negative amortization. Many borrowers do not realize this is happening since their perception is that their IDR method is a traditional loan payment which it is not.
A way to review your payment is to find a resource like the PayForED Student Loan Repayer. Typically, the loan servicer’s advice wants to keep you current and will put you in the lowest payment. This is often an IDR method. The Student Loan Repayer tool identifies what your monthly payment needs to be to avoid your loan balance from going up.
New IDR recertification Date Summary
With the CARES Act, Presidential Executive Orders, and the Consolidated Appropriation Act the restart of student loan repayment has become more confusing. As more borrowers use the IDR methods, properly managing your recertification dates and income will be critical to your financial future.
At PayForED, we make it our job to offer smart and efficient student loan solutions using our optimized software and resources. We do this is by providing information to help borrowers manage their recertification timing options. Use the above IDR Recertification Data Chart to properly evaluate your options. If you need professional advice, PayForED does have a list of College Funding and Student Loan Advisors.
Disclaimer: PayForED is not a tax consulting firm. Any of the above information needs to be review by a tax advisor since other tax items could impact your results.