Student Debt Resource

3: Income-Driven Repayment Plans

/ Student Debt E-book

Graduating from law school is bittersweet. A sense of accomplishment and the chance for new experiences can be sweet, but upcoming loan repayment may present a bitter counterpart. Fortunately, income-driven repayment (IDR) plans can relieve the stress of coping with law school debt by allowing you to repay loans with monthly payments based on a percentage of your income.  

There are two broad categories of repayment plans; balance based plans and IDR plans. This e-book will discuss balance based plans briefly for your reference, but the majority of this chapter will focus on IDR plans. 

Balance Based Plans 

Balance based plans are plans where payments are not based on income; they are calculated at amounts guaranteed to pay off the entire loan within a fixed period of time. There is no loan forgiveness under balanced based plans. These payment plans apply to both Direct and FFEL loans, including consolidation loans.  

  1. Standard: Under the standard balance based plan, you would make fixed payments over the course of 10 or more years. The payments would be a minimum of $50, regardless of loan balance. Payments will always be enough to cover accrued  interest. 
  2. Graduated: Under the graduated based plan, payments start out low and increase every two years. Like the Standard plan, payments under this plan are made for ten years. Payments will always be enough to cover accrued interest. Graduated payments may triple with every increase, so borrowers considering this plan should keep in mind that the ability to afford the initial payment amounts may not indicate the ability to afford subsequent payments. 
  3. Extended: The extended balanced based plan is an option for borrowers who have had no federal loans as of October 7, 1998, and who have a loan balance of more than $30,000. If you qualify, you can repay your loans with either fixed or graduated payments with a repayment term of up to 25 years. 

Note: The Standard Repayment Plan term is ten years unless you have consolidation loans. In this case, the term length extends up to thirty years depending on how much you possess in loan balance at the time you apply for consolidation. For more information, visit the section on loan consolidation

Income-Driven Repayment (IDR) Plans 

Overview 
With IDR plans, your monthly payments are based on a percentage of your discretionary income. The more income a borrower has, the higher the payments will be; less income brings lower payments. The unpaid loan balance is cancelled after payments are made for a period of time.  

There are four types of IDR plans:  

Revised Pay As You Earn “REPAYE Plan”  
Pay As You Earn “PAYE Plan” 
Income Based Repayment “IBR Plan” 
Income Contingent Repayment “ICR Plan” 

Discretionary Income 

All IDR plans calculate monthly payments at a percentage of a borrower’s discretionary income. So, what is discretionary income? 

The federal student loan definition of discretionary income is: 

For Income-Based Repayment, Pay As You Earn, Revised Pay As You Earn, discretionary income is the difference between your adjusted gross income (as determined by your most recent tax return or alternative documentation) and 150 percent of the poverty guideline for your household size and state of residence. For Income-Contingent Repayment, discretionary income is the difference between your adjusted gross income (as determined by your most recent return or alternative documentation) and 100 percent of the poverty guideline for your household size and state of residence.”

POVERTY GUIDELINE

For 2022, the federal poverty guidelines were:

Household/Family Size 100% 133% 150%
1 $13,590 $18,075 $20,385
2 $18,310 $24,352 $27,465
3 $23,030 $30,630 $34,545
4 $27,750 $36,908 $41,625
5 $32,470 $43,185 $48,705
6 $37,190 $49,463 $55,785
7 $41,910 $55,740 $62,865
8

$46,630

$62,018

$69,945

Household Size: Be sure that you understand how to calculate your household size. Your household size includes you, your spouse – if applicable, and your children, provided that the children will receive more than half their support from you, regardless of whether you claim them for tax purposes. This includes unborn children who will be born during the year for which you certify your household size. Household size also includes other people who currently  live with you, people who currently receive more than half their support from you, and who will continue to receive this support from you for the year that you certify your household size. Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, and payment of college costs. 

Loan Cancellation Provisions 

All IDR plans provide for taxable loan cancellation after you have made payments while enrolled for either twenty or twenty-five years. Once the applicable payments have been made, ALL unpaid loan principal and interest is cancelled. The full amount cancelled is then reported to the IRS via a 1099-C, commonly called the “cancelled debt form.” This may result in a tax bill during the tax year when the Department of Education files the 1099-C on your behalf.   Note that the Consolidated Appropriations Act of 2021 provides for tax-free loan cancellation through December 31, 2025. 

While any remaining loan principal and interest will be cancelled at the end of the repayment period that corresponds to your enrolled IDR plan, you could end up paying off the loan in full prior to receiving cancellation. The Department of Education notes “whether you will have a balance left to be forgiven at the end of your repayment period depends on a number of factors, such as how quickly your income rises and how large your income is relative to your debt. Because of such factors, you may fully repay your loan before the end of your repayment period.”  

Income Driven Repayment (IDR) Plan Request Form 

If there is one form you should be familiar with when considering repaying your loans under IDR plans, it is the Income Driven Repayment (IDR) Plan Request Form. A sample version of this form can be found here 

Note: When selecting an IDR plan in “Section 2: Repayment Plan or Recertification Request,” you may choose the “I want the income-driven repayment plan with the lowest monthly payment” option. However, if you select this option, your loan servicer may place you in the wrong payment plan for your current situation.  

This most often occurs with the REPAYE and PAYE plans. Both plans require that you pay 10 percent of your discretionary income. However, the REPAYE plan possesses no payment cap like the PAYE plan, so over time, you may pay more, even though the payment amounts are the same today. The PAYE plan provides cancellation after 20 years, while the REPAYE plan requires 25 years for cancellation for borrowers with graduate and professional loans, and 20 years for borrowers with only undergraduate loans. Additionally, if you switch into a different repayment plan later, all your accrued interest capitalizes. It is advisable to select what you project will be your best long-term option. 

The Repayment Plan or Recertification Request form can also be filled out electronically by: 

  • Going to StudentAid.gov 
  • Logging in with your FSA ID and password.  
  • Choosing “Manage Loans” from the upper menu 
  • Clicking the arrow for “Applying for an Income Driven Repayment Plan” and following the instructions. This form is then sent directly to your loan servicer for processing.  

The Repayment Plan or Recertification Request form is important for several reasons:  

  • To enroll in an IDR plan for the first time.  
  • To submit information required for the annual recertification of income.  
  • To have your monthly payment amounts under your IDR plan recalculated, (based on a change in financial circumstances or household size) between annual re-certifications.  
  • To change IDR plans.  
Selecting an Income Driven Repayment (IDR) Plan for the First Time 

When you enter repayment for the first time, and you decide an IDR plan is the way to go, you must formally enroll in the IDR of your choice. Enrollment happens in a few easy steps.  

(1) Get an FSA ID and password. You can do this at https://fsaid.ed.gov/  

(2) Determine what types of federal loans you have. You can do this via StudentAid.gov 

(3) Determine what IDR plans you qualify for. You can find out how to qualify for various repayment plans in the individual IDR sections below.

(4) Decide on an IDR plan.  

(5) Fill out an Income-Driven Repayment (IDR) Plan Request Form. If possible, this form should be filled out within the last two months of your grace period, in order to provide time for processing. However, in the event you do not possess such a grace period, your loan servicer can also grant a forbearance for up to 60 days, in order to give the loan servicer time to process your request form. 

(6) This form can be filled out on paper and mailed to your loan servicer, or filled out online at the Federal Student Aid website. StudentAid.gov website. The most common way to verify income is by providing your loan servicer with your most recent tax return. In the event you fill out the Income-Driven Repayment (IDR) Plan Request Form online, you can simply provide verification of your income information via the IRS Data Retrieval Tool. This tool electronically fills in your tax information from your most recently filed return in lieu of you having to provide your loan servicer with an official copy of your return. 

(7) Provide your loan servicer with proof of your income. Income includes money earned from any taxable source including employment, unemployment income, dividend income, interest income, and tips, but does not include income from untaxable sources such as Supplemental Security Income, child support, food stamps, or other state of federal public assistance.

Note: If you cannot provide your loan servicer with a tax return, or if your income has changed since you filed your last tax return, you can provide alternative documentation of your income. Alternative documentation can include a pay stub, letter from an employer that lists your gross pay, or a signed statement explaining each source of your income that lists the name and address of each source of income. 

(8) After your request form has been processed, your loan will determine your eligibility for your requested plan. If approved, the loan servicer will calculate your monthly payment and create for you a 12-month payment schedule. You can then retrieve your payment schedule from your loan servicer (typically by logging into your account with the loan servicer).  

(9) After completing steps 1-7, you are officially enrolled in an IDR plan. Make your payments on time!  

Annual Recertification 

Federal law requires you to provide your loan servicer with an annual recertification of your income. For this reason the loan servicer only creates a 12-month payment schedule when you enroll in an IDR plan.  

This recertification requires filling out a new Income-Driven Repayment (IDR) Plan Request form and sending it to your loan servicer. When filling out the form, select the option that states “I am submitting documentation for the annual certification of my income-driven repayment” where the form asks you to “select the reason you are submitting this form.” Failure to choose the correct option can result in your request form being processed incorrectly, and you being placed under a different plan with potential higher payments. You must accompany this form with your most recent tax return (or alternative documentation). As noted above, the request form can be filled out on paper or online at the Federal Student Aid website. If filled out online, you may also use the IRS Data Retrieval tool to provide the necessary income information for the recertification.  

Note: Failure to provide your loan service with an annual recertification of income can have severe consequences.  

PAYE: The borrower continues to repay their loans under the PAYE plan, however monthly payment amounts increase to what they would have been had you entered into the Standard Repayment Plan, (ten years) instead of the PAYE plan initially. Payments remain at this heightened amount until you recertify your income. Accrued interest also capitalizes.  

ICR: The borrower continues to repay their loans under the ICR plan, however monthly payment amounts increase to what they would have been had you entered into the Standard Repayment Plan, (ten years) instead of the ICR plan initially. Payments remain at this heightened amount until you recertify your income. Accrued interest also capitalizes.  

REPAYE: The borrower is removed from the REPAYE plan and placed in the REPAYE Alternative Plan. This plan calculates the monthly payment amount at a figure necessary to repay the outstanding loan balance in the shorter of ten years or the period remaining under the original REPAYE plan. The borrower remains in this alternative repayment plan until income is recertified. Accrued interest also capitalizes. 

IBR: The borrower continues to repay their loans under the IBR plan, however monthly payment amounts increase to what they would have been had you entered into the Standard Repayment Plan (10 years) instead of the IBR plan initially. Payments remain at this heightened amount until you recertify your income. Accrued interest also capitalizes.  

Changes in Financial Situation/Household Size 

You are only required to recertify your income annually. However, in the event your financial situation or household size changes between annual certifications, you can request your loan servicer to recalculate your payments. You would need to provide the loan servicer with a new Income Driven Repayment (IDR) Plan Request form as well as evidence documenting your change in financial circumstances.  

Documentation must be included for all current taxable sources of income. This can include pay stubs, a letter from an employer, or evidence documenting loss of employment. Documentation of a change in household size is not necessary, but it must be marked on the request form. Recalculated payment amounts remain in place until your next required annual certification. 

When filling out the request form,  select the option that states “I am already in an income-driven repayment plan and am submitting documentation early because I want my loan holder to recalculate my payment immediately” as the reason you are filling out the form. Failure to select the correct reason could result in undesired changes to your monthly payment amount or the repayment plan you are enrolled within.  

Loan Simulator  

The loan simulator, provided by the Department of Education, allows borrowers to calculate their monthly loan payments for federal student loans under any of the balance based or income-driven repayment plans. To use the loan simulator, simply input your annual gross income (AGI), family size and the amount of loans where indicated and the calculator does the rest. The calculator even allows you to log in with your FSA ID and password to have your loan amounts populated automatically to ensure the accuracy of the monthly payment amounts.  

A few tips for using the loan simulator: 

  • To get the most realistic results, provide complete and accurate information when using Loan Simulator.  
  • Keep in mind, this tool can’t predict your future payments with 100% accuracy.  
  • In order to make these predictions, Loan Simulator makes several assumptions as it calculates monthly repayment amounts. 
  • Learn more about the assumptions here: https://studentaid.gov/loan-simulator