An income-driven repayment plan can help make paying off student loans more manageable by tailoring your monthly payments to your income and household size. For example, income-based repayment (IBR) could be a good fit if you're at the beginning of your career and aren't earning a lot yet.
Payments on federally held student loans are paused and interest rates on federally-held student loans are set to 0% through January 31, 2022, as a result of the Coronavirus Aid, Relief and Economic Security (CARES) Act.
But what happens when your income drops and your payments no longer fit your budget? For example, you may decide to switch jobs or get laid off from work, both of which can directly impact your paychecks. Knowing what to do following a reduction in income could help you steady your monthly budget and weather the financial storm.
How to Report a Change in Income to Your Student Loan Servicer
The Department of Education offers an online tool to help guide you through the reporting process when your income changes. Here's how it works:
- First, visit the Department of Education's income-driven repayment plan website.
- Find the menu option that says "Recalculate my monthly payment" and log in to your account.
- On the next page, choose "I am submitting documentation early to have my income-driven payment recalculated immediately" from the menu.
- Answer the questions regarding marital status, employment, and number of dependents.
- Answer the questions regarding your most recent tax filing, income changes, and whether you have taxable income.
- If you mark "Yes" to the question about taxable income, you'll be directed to provide proof of income directly to your loan servicer.
- Once you complete the rest of the online tool, you'll receive a pre-filled application you can send to your loan servicer, along with your income documentation.
You have to document all of your taxable income you're currently receiving, including your spouse's taxable income if you're married. Taxable income includes money you earn from:
- Job income
- Unemployment benefits if you're laid off
- Dividends from your investments
The good news is you don't have to include things like child support or social security benefits you receive.
When documenting income, you have to tell your loan servicer where it comes from and how often you receive it. Pay stubs are usually sufficient, though if you can't furnish a piece of documentation you can substitute a signed statement explaining where the income comes from.
Once your loan servicer receives your application for a payment reduction and your income documentation, they can review them and determine whether your payments can be lowered.
The date on any form of supporting income documentation must be no more than 90 days from when you sign your application.
When You Should Report a Change of Income
The best time to report a change of income to your loan servicer is before you reach a point where you're struggling with how to pay off student loans. In other words, as soon as you experience an income drop that looks to be more than just temporary, you may want to reach out to see what options you have.
Remember that when you're on an income-driven repayment plan such as income-based repayment or Revised Pay As You Earn, you need to recertify your income annually so your loan servicer can ensure that you're still income-eligible.
Why You Should Report a Change in Income
Reporting a change of income, even if it's the loss of a part-time job or side gig that you work in addition to your full-time career, could make a difference in reducing your loan payments. If your budget is stretched thin and you're worried about missing payments, lowering payments through income recertification could help you avoid default.
You enter default status when you're at least 270 days late on making payments. Once you enter default, you aren’t eligible for income-driven repayment plans.
Defaulting can be harmful to your credit score, and it can also result in other negative consequences, such as wage garnishment and an offset of your tax refund.
Whether it makes sense to change your income-driven repayment plan depends on how long you expect your income to be lower than it was, how much of a financial strain your current payment presents, and what your new student loan payment may end up being.
Types of IDR Plans You May Want to Change to if You Lose Your Job
In addition to having your monthly payment recalculated, you may also consider switching to an income-driven plan if you think your income may stay low. A recession, for example, could mean your employer cuts hours or a slow down in business if you work in a service-based job.
You can make the switch to an income-driven plan from a non-IDR plan (standard, graduated, extended) or from another IDR plan, provided your loans qualify for IDR repayment.
If you switch from an IBR plan to another IDR plan, you will have to make at least one payment under a standard repayment plan before the switch is completed. The payment will likely be significantly higher because payments are not based on your income.
In that scenario, you may want to find the plan that's going to offer the lowest possible monthly payment. Currently, IDR plans include:
- Revised Pay As You Earn: Payments are generally 10% of your discretionary income.
- Pay As You Earn: Payments are generally 10% of your discretionary income but never more than what you'd pay on a standard 10-year repayment plan.
- Income-Based Repayment: Payments are generally 10% of your discretionary income if you took out your loans after July 1, 2014 (15% for loans taken out before July 1, 2014) but never more than the Standard 10-year Repayment Plan amount.
- Income-Contingent Repayment: Payments are the lesser of 20% of your discretionary income or what you would pay on a repayment plan over 12 years with payments adjusted to your income.
The Department of Education offers a loan simulator to help you estimate your payment amount under each plan. Use the simulator to gauge which plan may work best based on your current income.
Other Options to Consider
There are other ways to manage student loans when you can't afford payments. With federal loans, you can take a deferment or put loans in forbearance temporarily.
With either one, you can take a break from making payments toward eligible loans for a set period of time set by your loan servicer. The difference lies in how the interest on subsidized loans is treated.
During a deferment period, you're not responsible for paying the interest that accrues on subsidized loans and federal Perkins loans (this program ended in 2017), because the government pays the interest for you. You will pay for interest on unsubsidized loans, direct PLUS loans, and loans from the federal family education loan (FFEL) program. (This program ended in 2010.)
With a loan forbearance, however, interest will accrue on direct loans and FFEL loans during the time you aren’t making payments. You can make interest-only payments during your forbearance, which could be a smart choice because any interest you don’t pay will be added to your principal. Consequently, you may end up with a higher loan balance at the end of your forbearance.
In March 2021, the Department of Education expanded the loan forbearance created by the CARES Act to apply to Federal Family Education Loans (FFEL) owned by private parties. Any payments made between March 13, 2020, and September 30, 2021, are eligible for reimbursement. Garnished wages or tax refunds will be returned to the borrower, and the loans will be restored to good status.
You have a total of three years of forbearance and three years of deferment. After requesting a deferment or forbearance for your loans, you must continue making payments until you receive notification that you've been approved.
What Not to Do
The worst thing you can do when managing student loans after a job loss or drop in income is to stop your payments. This puts you at risk of default, which can create new problems if you're then in the position of trying to rehabilitate those loans later. The best approach is a proactive one, in which you communicate regularly with your loan servicer to find a solution when you're struggling to make student loan payments.
- If you lose income, recertifying your income-driven repayment plan could reduce your monthly payments.
- If you’re in a standard, graduated, or extended repayment plan, switching to an IDR plan could reduce your monthly payments significantly.
- Not making payments for at least nine months will have severe effects on your credit score and could lead to wage garnishment.
- Talk with your student loan servicer about which IDR plans you’re eligible for. One phone call could alleviate a lot of stress and confusion.