Under an Income Driven Repayment Plan, a borrower’s payment amount is based on calculated disposable income considering family size and household income. For those who are in a very low income situation, the amount due for payments can be zero. There are several different types of Income Driven Repayment Plans. These are the Revised Pay as You Earn Repayment Plan (REPAYE Plan), Pay as your Earn Repayment Plan (RAYE Plan), Income Based Repayment Plan (IBR Plan), and Income Contingent Repayment Plan (ICR Plan).
An Income Driven Repayment Plan reduces what is owed monthly by a borrower and extends the time for repayment. If, at the end of the designated repayment period, there is a remaining balance on the loan, that remaining balance is forgiven. Each of the different specific programs have their own repayment period and monthly payment determinations.
Revised Pay as You Earn Repayment Plan: A borrower with a Direct Student Loan, Direct PLUS Loan for graduate or professional studies, a Direct Consolidation Loan that is not part of any PLUS loan by parents, or, provided they are consolidated into a Direct Loan, a Federal Family Educational Loan Program loan or a Federal Perkins Loan, may repay under the Revised Pay as You Earn Repayment Plan. Under the Revised Pay as you Earn Repayment Program, payments are 10% of the determined discretionary income. If this plan is for the repayment of a loan used only for undergraduate education the repayment period is 20 years. If any loan the borrower is repaying under the plan was to receive a graduate or professional education the repayment period is 25 years. At the end of the 20 or 25 year period, as applicable, as long as all payments were made as required, any remaining balance is forgiven and the loan is discharged.
Pay as You Earn Repayment Plan: A borrower with a Direct Student Loan, Direct PLUS Loan for graduate or professional studies, a Direct Consolidation Loan that is not part of any PLUS loan by parents, or, provided they are consolidated into a Direct Loan, a Federal Family Educational Loan Program loan or, provided it is consolidated into a Direct Federal Loan, a Federal Perkins Loan, may repay under the Pay as You Earn Repayment Plan. Under a Pay as You Earn Repayment Plan, the payment amounts are generally 10% of the borrower’s discretionary income, but not more than the amount would be under the Standard Repayment Plan. The repayment period for the Pay as You Earn Repayment Plan is 20 years and at the end of the repayment period the remaining balance, if any, is forgiven.
Income Based Repayment Plan: A borrower with a Direct Student Loan, Direct PLUS Loan for graduate or professional studies, a Direct Consolidation Loan that is not part of any PLUS loan by parents, a Federal Family Educational Loan Program loan, or a Federal Perkins Loan, may repay under the Income Based Repayment Plan. Under the Income Based Repayment Plan, if the borrower has a new loan on or after July 1, 2014 the amount due per month is generally 10% of the borrower’s discretionary income but not more than what would be due under the Standard Repayment Plan. If the borrower’s loan is already existing as of July 1, 2014 the amount due to generally 15% of the borrower’s disposable income but now more than what would be due under the Standard Repayment Plan. The repayment period under the Income Based Repayment Plan if the loan was new on or after July 1, 2014 is 20 years, if the loan was not new on July 1, 2014 the repayment period is 25 years. Under both, at the end of the repayment period, any remaining balance is forgiven.
Income Contingent Repayment Plan: A borrower with a Direct Student Loan, Direct PLUS Loan for graduate or professional studies, a Direct Consolidation Loan including PLUS loan by parents, and, provided it is consolidated into a Direct Federal Loan, a Federal Family Educational Loan Program loan including PLUS Loans made to parents, or a Federal Perkins Loan, may repay under the Income Contingent Repayment Plan. Under the Income Contingent Repayment Plan, the payment amount due is either 20% of the borrower’s discretionary income or what would be due under a fixed payment plan over 12 years adjusted according to the borrower’s income, whichever is less. The repayment period under the Income Contingent Repayment Plan is 25 years with the remaining balance as the end of the repayment period forgiven.
Those under any Income Driven Repayment Program can qualify for earlier forgiveness under the Public Service Loan Forgiveness Program if the requirements under that program are also met while remaining current on due payments under the Income Driven Repayment Program. If the borrower qualifies under all the requirements for the Public Service Loan Forgiveness Program, the loan can be forgiven in 10 years instead of the 20 to 25 years of the repayment period.
The determination of the borrower’s disposable income for calculating the payment amount and repayment plan eligibility, the borrower’s adjusted gross income of alternative documentation of income is used. This must be provided when submitting the request for an Income Driven Repayment Plan.
The borrower’s adjusted gross income will be used if the borrower filed a federal income tax return in the last two years and the borrower’s current income isn’t significantly different from the income reported on the borrower’s most current federal income tax return. The borrower’s adjusted gross income can be provided by either applying using the online Income Driven Repayment Plan Request and use the IRS Data Retrieval Tool during the application to retrieve the information from the federal income tax return, or by including a paper copy of the borrower’s most recently filed federal income tax return or IRS tax return transcript along with the paper Income Driven Repayment Plan Request.
If the borrower has not filed a federal income tax return in the past two years, or the borrower’s current income in significantly different from the borrower’s reported income in the latest federal tax return alternative documentation can be used to determine eligibility and payment amounts. This can be by providing pay stubs or other documentation of income with a paper Income Driven Repayment Plan Request if the borrower received taxable income, or indicting on the request that the borrower has no taxable income.
Every year, a borrower who is on an Income Driven Repayment Program must recertify their income and family size every year. If there is a significant change in either income or family size the borrower can report this before the recertification date and have their payment amount re-determined ahead of the annual renewal date. This is done by submitting a new application for an Income Driven Repayment Plan and selecting the reason for resubmitting to have the repayment amount recalculated immediately. There is no penalty for not having your repayment amount recalculated before the scheduled date.
Under a Pay as You Earn Repayment Plan or Income Based Repayment Program, the monthly payments are based on a combination of income and family size. However, if the calculated amount based on income and family size should be greater than what it would be under a Standard Repayment Plan, the required monthly payment amount will be set as if the borrower was under a Standard Repayment Plan. Should there be a change in income or family size the borrower can still have the repayment amount recalculated based on this change to reduce the payment amount.
Under the Revised Pay as You Earn Repayment Plan or Income Contingent Repayment Plan the payment amount is also based on income and family size, but the payment amount it not capped at what it would be under the Standard Repayment Plan. This can result in monthly payments being greater than they would be if the borrower was under a Standard Repayment Plan.
If a borrower on an Income Driven Repayment Plan fails to recertify in the yearly renewal date, interest that has accrued on the loan will be added to the principal balance of the loan. This will cause later applied interest to be on this new higher loan amount increasing the later interest and in turn the amount that has to be paid. In addition, other penalties will be applied based on the type of Income Driven Repayment Plan the borrower is under.
If the borrower is under a Revised Pay as You Earn Repayment Plan, the loan will be removed from the Revised Pay as You Earn Repayment Plan and placed on a different repayment plan. The new plan would not be income based and the full repayment and the entire amount due on the loan will be repaid within either 10 years from the new repayment plan is set or the ending of the 20-25 years remaining had the borrower remained on the Revised Pay as you Earn Repayment Plan. After the repayment plan is changed, the borrower may chose to leave the loan on the new plan or request another plan for which the borrower is eligible.
If a borrower is under a Pay as You Earn Repayment Plan, Income Based Repayment Plan, or Income Contingent Repayment Plan, the borrower remains on the same Income Driven Repayment Plan. However, the monthly payment amount will no longer be based on income and instead require an amount equal to that under the Standard Repayment Plan and based on the initial loan amount when the borrower was first put on the Income Driven Repayment Plan. Payment amounts based on income can be later restored provided the required information and documentation is provided to the loan servicer and the borrower’s updated income still qualifies them to make income based payments.
The Income Driven Repayment Plan that best suits a borrower will depend on the type of loan the borrower has and their individual circumstances. Borrowers who only have Direct Federal Student Loans have the most options for what best suits their monthly payment amount and repayment length needs. Borrowers with a Federal Family Education Loan Program loan only quality for the Income Based Repayment Plan unless the borrower consolidates their loan into a Direct Loan.
To apply, an Income Driven Repayment Plan Request should be submitted along with required documentation to establish the borrower’s family size and income amount. This can be done electronically or on paper. If the borrower is currently paying on their loan, the borrower may wish to have their loan placed in forbearance while the application is reviewed.
The amount of the loan forgiven under an Income Driven Repayment Plan may be subject to taxes as income up to 25% of the balance forgiven amount. This would be included in the tax year that forgiveness is received. This can potentially be a substantial tax liability and an economic detriment for a borrower who is low income paying little to nothing in monthly payments over the 20 to 25 year repayment period. As such low payment amounts would cause the full or nearly full principal balance on the loan to remain, the resulting tax liability can cause a financial hardship to the borrower in the tax year the remaining balance is forgiven.
While one student loan servicer is currently under suit from several states, this suit is regarding misleading borrowers and failing to disclose repayment options available to borrowers. It does not have any relation to the Income Driven Repayment Program or borrowers who applied for a repayment plan under the program receiving the benefits of the program.
SOURCES
32 CFR §685.208
32 CFR §685.209
32 CFR §685.221
Federal Student Aid, U.S. Department of Education, If your federal student loan payments are high compared to your income, you may want to repay your loans under an income-driven repayment plan (https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven)
Federal Student Aid, U.S. Department of Education, Choose the federal student loan repayment plan that’s best for you (https://studentaid.ed.gov/sa/repay-loans/understand/plans)
Anderson, Tom, Student loan forgiveness can come with a tax bomb, CNBC, September 11, 2016 (https://www.cnbc.com/2016/09/09/student-loan-forgiveness-can-come-with-a-tax-bomb.html)
Aliyev, Elmar, Navient Lawsuit: What should borrowers know, Student Loans Resolved, February 14, 2019 (https://studentloansresolved.com/2019/02/14/navient-lawsuit-borrowers-should-know/)
Friedman, Zack, What This Navient Lawshit Means For Your Student Loans, Forbes, July 9, 2018 (https://www.forbes.com/sites/zackfriedman/2018/07/09/student-loans-navient-lawsuit/#3424ce7c2777)
Contact our office by calling toll-free to 1-800-233-8521 to see whether you qualify for loan forgiveness or reduction based on your personal circumstances.