13 FAQs for Income-Driven Repayment Plan

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Income-Driven Repayment Plan

If you are in financial trouble, you have probably been recommended to enroll in the Income-Driven repayment option. This repayment plan is usually preferred to other solutions, like forbearance, during times of economic struggles. Specifically, during the COVID-19 pandemic, the number of people struggling with repayment increased. Hence, the Income-Driven Repayment plan gained more importance.

This guide answers 13 frequently asked questions related to the Income-Driven Repayment plan. 

What is an Income-Driven Repayment Plan?

An Income-Driven Repayment plan is one of the repayment options available to federal student loan borrowers. As its name suggests, this plan is based on your earning size. Hence, if you earn a lot, your monthly payments will be higher. On the other hand, if your income is extremely low, you can even qualify for $0 monthly payments. 

As the income level determines the payment amount, this repayment plan is the best for borrowers with financial challenges. If you cannot afford payments, enrolling in an Income-Driven Repayment plan can be a better option than requesting loan forbearance or deferment. 

Additionally, if you want to get Public Service Loan Forgiveness, you need to repay the debt through Income-Driven Repayment options.

How Much Do I Pay under the IDR Plan?

As the name suggests, an Income-Driven Repayment plan is based on your earnings. Besides, your family size matters. Hence, your payment amount will change depending on these two factors. Reasonably, if your family is big, you have higher spending. So, your monthly loan payment amount should be lower. In some extreme cases, where earnings are less and family is big, the borrowers can even qualify for $0 monthly payments. 

However, in other cases, your monthly payment is some percentage of discretionary income. Discretionary income is the earning amount left after deducting taxes and other essential spendings. As you repay debt from your discretionary income, it does not interfere with essential expenses. Therefore, borrowers do not face much difficulty repaying debt under the Income-Driven Repayment plan. 

Keep in mind that your payment can be 10% or 15% of your discretionary income. The exact rate depends on which type of Income-Driven plan you are going to choose. 

How to Determine Exact Repayment Amount?

Income-Driven Repayment Plan

As mentioned before, your exact payment amount depends on different categories of Income-Driven Repayment plan, earning level, and family size. However, if you want to get some idea on repayment, you can use the Loan Simulator tool. The Education Department provides this tool on its official Student Aid website.

You will be required to submit your qualifications so that the Loan Simulator calculates payments under different repayment plans. As a result, you can compare various federal repayment plans and choose the one that suits your budget the best. 

Alternatively, you can contact your loan servicer. Federal loan servicing companies are intermediaries who act on behalf of the Education Department. They collect the payments, handle the billing, help borrowers with financial challenges, etc. You can contact them to determine which plan is most suitable for you. However, keep in mind that there is no fee involved in this process. If someone calls you, like a loan servicer, and asks for money, ignore the call.

You can also use the Income-driven Repayment plan calculator provided by different companies on their websites. This option does not generate 100% accurate results but at least helps you form expectations. 

Will I Always Pay the Same Amount?

No, your repayment amount can change. Every year, all borrowers are required to update their credentials, such as family size or earning level. This process is called recertifying income or family size. As the repayment is based on these elements, if there are changes to them, your loan payment amount will vary. For instance, if you lose your job due to the COVID-19 pandemic, your new repayment amount will be much lower. 

Remember that recertification is necessary even if your qualifications are still the same. Your loan servicer will send you a notification about the deadline for recertification. Please, submit it before the deadline so that you do not face negative consequences. If you miss recertification, your monthly payments can increase, or you can lose eligibility for the Income-Driven Repayment plan. 

Additionally, you do not need to wait for the new year to update your credentials. If your qualifications change considerably during the year, you can request a loan servicer to recalculate your monthly loan payment amount. However, first, you need to submit a new Income-Driven Repayment (IDR) plan request. While filing the request, you will be asked why you submitted the application. You need to respond that there is a significant change to your documentation and you want payments to be recalculated. 

What Happens if I Forget Recertification of Income?

Your loan servicer is responsible for informing you about the recertification deadline. However, some borrowers can still miss the notification and forget to upload income and family size documentation to get monthly loan payments recalculated. In this case, the consequence depends on which plan you are enrolled in.

Pay as You Earn, Income-Based and Income-Contingent Plan

You will not lose your eligibility if you are enrolled in the Pay as You Earn, Income-Based, and Income-Contingent Repayment plan. In other words, you will still be enrolled in these plans even if you do not recertify documents. However, your loan payment amount will no longer be based on earnings. Instead, you will pay what is required under the 10-year Standard Plan.  

REPAYE Plan

Yet, if you use the Revised Pay as You Earn program, you will lose eligibility in case of non-recertification. Your student loan will be placed in an alternative plan. The new monthly payment amount will either be the rate required to repay debt in 10 years or the ending date of the REPAYE plan, whichever is earlier. Sure, you will also have a chance to enroll in other Income-Driven Repayment options instead of alternative plans.

REPAYE, PAYE, IBR Plans

Moreover, any unpaid interest rate will be capitalized on your outstanding balance if you are enrolled in REPAYE, PAYE, or IBR plans. Capitalization means that interest is added to your original debt plans. Therefore, your debt amount increases, and you pay more interest over time. Overall, you will end up paying more in the long run than what you originally owed. 

What Happens if I Forget Recertification of Family Size?

Income-Driven Repayment Plan

Besides income, each year, you need to recertify your family size. If the family is large, debt payment is lower. On the other hand, if your family is small, your spending is less, so loan payment is more.

If you do not recertify your family size, the loan servicer will assume that the size of your family is one. Hence, your loan payment amount will be higher than if you submitted a larger family size. Therefore, not recertifying family size is not desirable. Besides, you can lose the privilege to make payments based on income if you are enrolled in Income-Based or Pay as You Earn plans. 

How Long Will I Be in Repayment?

The Income-Driven Repayment plan has different types. Hence, the exact repayment period depends on which plan you decide to enroll in. Generally speaking, you can repay debt in 20 or 25 years. Such a repayment period might seem longer than other repayment programs, like the Standard plan. Yet, do not forget that as the repayment period gets shorter, you make higher monthly payment amounts. Hence, if you want a more affordable plan, finding one with a shorter payback period is hard. 

Yet, the great advantage of an Income-Driven Repayment plan is that borrowers receive full loan forgiveness for the remaining balance after the repayment plan. For example, if you enroll in the Pay as You Earn program, you will be required to repay debt for 20 years. At the end of this period, if you still have an outstanding debt balance, the government will forgive or eliminate it. You will not pay a penny for the remaining amount from your pocket. 

Is Forgiveness Taxable under Income-Driven Repayment?

Unfortunately, yes. The Income-Driven Repayment plan brings forgiveness to the remaining balance at the end of the repayment period. While forgiveness sounds attractive, it might not be highly beneficial for you. Under the current IRS rules, loan forgiveness through a repayment plan is considered taxable income. Hence, if you receive forgiveness, you might be required to pay additional income taxes. 

For example, if you get forgiveness for $10,0000 outstanding debt balance, and the tax rate is 10%, you might be required to pay $1000 as additional taxes. The amount might seem not trivial compared to the forgiven debt balance. However, many people do not have ready cash for extra tax payments. Hence, they can again incur debt to pay taxes. So, consider this feature before applying to an Income-Driven Repayment plan.

How to Decide if an Income-Driven Repayment Plan is a Right Choice?

Among different federal student loan repayment programs, you might feel confused about which is the best for you. Luckily, there exist different strategies to determine which plan is the right choice. 

First, you can do your research. Check the Student Aid website or our blogs to get familiar with the eligibility conditions, payment amount, etc. However, this method can be hard because many borrowers do not have the professional financial skills to understand the technical terms of repayment plans. 

Next, you can contact the loan servicer. Loan servicers will help you identify which plan is the best and enroll you. Please, keep in mind that enrolling in a new plan is free, and no one can demand you make payments for this purpose. 

It should also be mentioned that, unfortunately, loan servicers sometimes can misguide the borrowers. As they handle the operations for millions of student loan debtors, loan servicers can’t provide customized services for each of the borrowers. Hence, sometimes, they misguide borrowers to wrong repayment plans or ineffective debt resolutions strategies. Therefore, you can get help from third-party debt experts, like Forget Student Loan. Our specialists have years of experience with borrowers, and they can provide customized services to you. In addition, they will analyze your finances and help to identify the right choice. 

Where to Send an Income-Driven Repayment Plan Request?

If you want to enroll in an Income-Driven Repayment plan, you need to fill an application form. This application form is called Income-Driven Repayment Plan Request. You can submit it online or based on paper-from. Online application is available in your FSA profile which can be accessed through the Student Aid website. On the other hand, you can request a paper application form from the loan servicer. You need to fill the form, attach documents, and mail it to the instructed address. If you have multiple loan servicers, one application per servicer is necessary. 

Loan servicers need some time to process your documents and calculate the loan payment amount. Hence, it will take around a few weeks to get your request processed. If you are in financial difficulty, you can ask the loan servicer to grant loan forbearance until you enroll in a new plan. 

What are Different Types of Income-Driven Repayment Options?

Income-Driven Repayment Plan

To give more flexibility to borrowers, the federal government offers multiple Income-Driven Repayment options. You can choose the one that suits your budget the most.

  • Revised Pay as You Earn plan – this plan requires 10% of your discretionary income, which makes it extremely affordable. It takes 20 years for undergraduate students and 25 years for graduate students to pay out debt under this plan. 
  • Pay as You Earn – Similarly, the Pay as You Earn plan also requires only 10% of discretionary income. However, it takes 20 years for the borrowers to get forgiveness for their remaining debt balance. Keep in mind that your payment will never be more than a 10-year Standard plan with this option. 
  • Income-Based Repayment – The payment amount can be 10% or 15% of discretionary income, depending on when you received your loan. New borrowers (after July 2014) pay lower interest rates than others. Similarly, their repayment period is only 20 years. Others pay 15% of discretionary income for 25 years to qualify for forgiveness.
  • Income-Contingent Repayment – Borrowers under Income-Contingent Repayment plan pay 20% of discretionary income. Alternatively, it is possible to pay the amount that repays the debt in 12 years. Besides, borrowers can repay debt in 25 years.

What are the Alternatives to Income-Driven Plans?

The income-Driven Repayment plan is usually the most effective solution if you are facing financial difficulties. With this plan, borrowers pay a small amount of money monthly for their debt obligations. Hence, debt repayment becomes easier. 

However, if you do not qualify for this plan, then alternatives exist. First, you can apply for loan forbearance or deferment. These benefits will stop repayment for a few months. Hence, you can focus on improving your finances. However, they are short-term solutions.

If you do not face financial difficulties and only want a suitable repayment program, then you can check other federal loan repayment options.

Graduated Repayment Plan

With a Graduated Repayment Plan, your payments will be low in the initial years. However, the payment amount increases every two years. Hence, if you have just found a job and you believe your income will be higher in the future, this plan might be suitable for you. Besides, it takes ten years to repay the debt, except for consolidation loans, it is up to 30 years. 

Standard Repayment Plan

The Standard Repayment plan also helps borrowers to repay debt in 10 years. However, the payment amount is fixed and does not change over time as the Graduated Repayment plan does. Your minimum monthly payments will be $50 under this plan.

Extended Repayment Plan

Extended Repayment Plan is a mixture of the above-mentioned two options. It is possible to pay a fixed amount or graduated amount under this plan. However, it usually takes 25 years to repay debt. Moreover, there exist different eligibility criteria, such as having more than $30,000 outstanding debt balance. 

How to Change the Repayment Plan?

Changing repayment plans is easy and free. You only need to contact your loan servicer and follow the instructions. You might be required to fill an application form and submit documentation. The rest is waiting for the request to be approved and a new repayment amount to be calculated. Keep in mind that there can be scammers asking for a fee when you want to change your income-driven repayment plan. Do not follow their instructions, as no other organization than loan servicing companies has an affiliation with the Education Department for this matter.