For many student loan borrowers, the next few months are the peak time to recertify your student repayment. This affects any person who is using an Income-Driven Repayment Method (IDR). Before we discuss recertifying your student loan repayment, let’s review what IDR is. As more students and families need to borrow money for college, the monthly repayments have gone up making it more difficult for the borrowers to manage their monthly payments. As a result, new repayment methods were developed using income as a basis and not the loan balance as a determining factor. These new methods have made repayment more affordable but have added a significant level of complication.
The IDR repayment methods were developed by the federal government to help borrowers stay current with their student loan repayment. The IDR loan methods are tied to a person’s Adjusted Gross Income or AGI. Borrowers who decide to use an IDR repayment method are required to recertify their repayment amount each year. The IDR methods include Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income Contingent Repayment (ICR) and Income-Sensitive Repayment (ISR).
The default repayment option is the 10-year Standard method once repayment begins. The standard 10-year method is typically the highest monthly payment. For this reason, many borrowers consider and select an Income-Driven Repayment method. The IDR plans offer lower monthly payment options than the standard 10-year repayment method. Along with the 10 Year standard, there is the Extended Standard, Graduated, and Graduated Extended. All of these follow the traditional repayment theory since they are based on the loan amount, time and interest rates.
Timing of Repayment
For many federal loan borrowers, the fall is the time of year to recertify your Income-Driven Repayment Plan (IDR). The months of October, November, and December are very common months for this update due to the 6 months grace period students get after they graduate. When the grace period ends, many borrowers will select their repayment method. The IDR recertification is the date tied to when the borrower originally signed up for their IDR plan. It is unique to each borrower. The first notification will be sent out approximately 3 months before the actual renewal date.
It is critical that you recertify your IDR method. In some cases, the repayment method change can be significant and will result in the outstanding interest being capitalized. This will increase your loan balance.
Income-Driven Repayment Chart
As stated above, the IDR plans are tied to the borrower’s income, specifically their Adjusted Gross Income. The Income-Driven Repayment plans cap a borrower’s payment based on a percentage of their monthly discretionary income. The discretionary income is calculated by using the poverty level, family size, and adjusted gross income. Each of the IDR methods has its own applicable percentages. Depending on the plan, the loan term can be up to 20 or 25 years. At the end of this timeframe, the outstanding balance would be forgiven. The borrower should be aware that the loan amount forgiven would be taxed as income under the current rules. This excludes loan forgiveness under the Public Service Loan Forgiveness Option (PSLF).
Here are the Income-Driven Methods, the percentage used and the federal loans types that can be used:
|IDR Name||IDR Abbrev||% of Income||Loan Type||Forgiveness Years|
|Income-Based Repayment||IBR||15||Direct or FFEL||25|
|Pay As You Earn||PAYE||10||Direct||20|
|Revised Pay As You Earn||REPAYE||10||Direct||20|
Please note your repayment options are determined based on the date of the loans, which may limit the borrower’s repayment options. This is why your loans should be organized and reviewed before a loan repayment consolidation is developed.
How do you recertify your IDR PLAN?
The government makes it easy for federal student loan borrower to update their income verification information. Simply go online at StudentLoans.gov and select the Complete Income-Driven Repayment plan request link. The borrower will need their FSA ID and password before they can update their income verification.
The Income used will be the most current tax filing information that has been filed. Based on your recertification date and your Adjusted Gross Income (AGI) reported on your tax will impact your new monthly IDR payment amount. Another factor could be a change in your family size.
Recertification and Marriage
If your marital status has changed to married this year, you have some additional decisions to make. Your recertification is based on your reported Adjusted Gross Income (AGI) that is reported on your taxes. Depending on the couple’s debt structure and income, you may need to investigate various tax filing options. Getting married adds another source of income to your family household and this increase to a borrower’s income can change your student loan payment, significantly. The government uses your filed taxes to verify the household income.
This becomes an issue depending on when the marriage occurred, how your most recent taxes were filed and the timing of your recertification. The recertification requires that you use the most current information. The borrower often overlooks this part of the loan repayment planning. The loan service companies legally cannot explain the tax filing options to the borrower. An incorrect decision could cost the borrower thousands of dollars in either tax or repayment dollars a year.
Tax decisions and tradeoffs
It is not an easy decision, and there can be tradeoffs in the tax planning that the couple must review and understand. The couple should do two tax calculations and determine if it is financially better to get the tax benefit when filing jointly or file separately and miss out on student loan interest deduction. In addition, if filing married and separate, a borrower may qualify for a lower monthly payment if they have federal loans.
The Pay For ED Student Loan Repayer can easily make this comparison for couples wanting a quick review of their tax filing options. The software does the two tax calculations so that you can determine whether it is financially better to get the tax benefit of filing jointly or filing separately. It helps the borrower understand how their student loans and taxes are interrelated.
We recommend that you have your taxes reviewed by a tax professional to determine the different tax consequences of filing your taxes. The newly married couple needs to compare the income tax versus the various loan repayment options. The selected tax filing decision may cause a higher income tax but could result in a lower monthly loan repayment amount. In most cases, the tax advisor will not see the loan repayment savings since their focus usually is on lowering your tax bill. You may need to make that comparison on your own before you finalize your taxes. In most cases, this will need to be done annually as your financial life will change.
It is essential that the borrower understands the specific IDR plan that they are enrolled in. The newer REPAYE does not allow married couples to file their taxes separately to qualify for a lower payment.
Consequences of Not Submitting an Update for Recertification
There are consequences to the borrower if they do not recertify their IDR Plan renewal application. It turns into a costly mistake for the borrower because when the IDR plan is not updated, the monthly payment converts to the ten-year standard repayment plan. This amount could be considerably higher than the IDR monthly amount and will increase the monthly amount for the borrower. Also, any outstanding accrued interest will then be added to the principal balance. You do not want this to happen and is another reason why borrowers need to be organized.
If you are using the IBR method, you actually need to make a standardized 10-year monthly payment before you can be re-enrolled in the IBR method.
Searching for Help
As you can see, this is a very complicated process, and many personal financial decisions could have a domino effect on your options. Do you research before you hire a company to help you with your student loan repayment plan? In the past few months, the Federal Consumer Protection Bureau has filed suit against several companies. Nerdwallet has compiled a Watchlist of companies who were charged for fraudulent or questionable debt relief services.
To get the proper advice, the advisor must understand all of the federal loan repayment methods, private consolidation options, and personal taxes. Your planning should include decisions that are not just as of today but possible future changes. Consider changes such as marriage or job movement since these personal decisions will affect your future repayment decisions.
PayforED has two ways to help borrowers take the stress and worry out of their student loan repayment decisions. Our comprehensive software, the Student Loan Repayer allows borrowers to get clarity on their student loan repayment options by viewing their student loan debt in a single view option. Our website also has a list of financial advisers who have been trained in college funding and student loan repayment. They can answer questions about your student loan situation. The College Funding & Student Loan Advisors (CFSLA) are listed on the Pay ForED website.
Figuring out your student loan repayment and keeping up with the loan updates is not always an easy task. Being organized is the first step. If you have any questions, please ask your tax professional or a financial advisor who has expertise in the student loan area.