For many federal loan borrowers, this is the time of year to recertify your Income Driven Repayment Plan (IDR). Many borrowers do not realize that this needs to be done annually if the borrower has selected a repayment option that is based on the borrower’s income. 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 they originally signed up for their IDR plan.
The IDR repayment methods were developed to help borrowers stay current with their student loan repayment. The default repayment option is the 10-year Standard method. The standard method typically is the highest monthly payment. For this reason, many consider and select an Income Driven Repayment method. The IDR plans offer lower monthly payment options than the standard 10-year repayment method.
The Income Driven Repayment plans cap a borrower’s payment based on a percent 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 their 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 borrower should be aware that the loan amount that is 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||% used||Type||Forgiveness Years|
|Income Based Repayment||IBR||20||Direct or FFEL||25|
|Pay As You Earn||PAYE||15||Direct||20|
|Revised Pay As You Earn||RePAYE||15||Direct||20|
Your repayment options are determined based on the date of the loans, which may limit the borrower’s repayment options.
Consequences of Not Submitting Update
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 a reason why borrowers need to be organized.
Timeframe for Annual Renewal
The timeframe for the annual renewal application is individual to the borrower. The first notification will be sent out approximately 3 months prior to the actual renewal date. For most college graduates, their grace period will be ending and loan payments will begin sometime in November through January timeframe.
Considering that fact, many borrowers who have already consolidated using IDR, may be facing their annual renewal or recertification. If you are not sure of your specific recertification date, contact your loan servicer.
How do you recertify your IDR Plan
The government makes it easy for the 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.
If your status has changed to married this year, you have some additional decisions to make as your recertify your IDR plan. The reason for this is that getting married adds another source of income to your family household. This increase to the total income can change your student loan payment. 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 recent information. The borrower overlooks this part of the loan repayment planning. The loan service companies legally cannot explain the tax filing comparison to the borrower. An incorrect decision could cost the borrower thousands of dollars in either tax or repayment dollars.
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.
I recommend that you have your taxes reviewed by a tax professional to determine the different tax consequence of filing your taxes. The newly married couple needs to compare the income tax versus the different 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 is normally on lowering your tax bill. You may need to do 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 important 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.
Searching for Help
As you can see, this is a very complex process and many personal financial decisions could have a domino effect. 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 listed 130 companies who they had received complaints about regarding their student loan repayment advice.
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.
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.
Families should also be aware that there may be changes in the student loan repayment area once the current administration proposals are confirmed. As of this date, there is nothing approved.