Taxes, IDR Plans, and Student Loan Payments

My Taxes are Done, Will My Student Loan Payments Go Up?

If you’re on an income-driven repayment (IDR) plan, your monthly payment is calculated using your most recent taxes. Clients sometimes ask us, “If I reported a higher income on my taxes last year, does that mean my payments will increase, too?” It depends on each individual’s situation, but the broad answer is “not necessarily.” There are situations in which you can use a lower income than what’s on your taxes for your payment calculation, and there are other ways in which you can keep your AGI low on your taxes to avoid a higher payment. 

When Not to Use Your Taxes for an Income Recertification

The Department of Education requires that loan servicers recertify incomes every year for all borrowers on IDR plans. The timing is unique to each borrower, and servicers must provide ample notice. When it’s time, your servicer will contact you and you’ll be directed to fill out a form that includes pulling your most recent tax filing. If your income was higher on last year’s taxes than your current income, for any reason, you may want to submit alternate documentation. Borrowers are permitted to submit documents, such as pay stubs, as proof of income in the event that their income “decreased” since their most recent taxes. If, for example, you worked extra shifts grinding for a downpayment on a house, took locums tenens jobs, or anything else to boost your income beyond your normal salary, you can submit that alternate documentation so your payments don’t increase.

How to Avoid Higher Taxes and Student Loan Payments

Even if your income increases due to salary raises, you may still be able to maintain or lower your student loan payments through pre-tax contributions. These lower your adjusted gross income (AGI), which, in turn lowers your student loan payments. By maximizing your pre-tax contributions, you ensure that you’re paying the least amount both in taxes and in your student loans. That way, you’ve saved the tax on your retirement, saved money on your annual tax liability, and on your student loans!

Navigate is not a tax agency, nor are we certified to give tax advice. We are, however, experts in student loan management and have helped customers save millions in student loan payments. If you have questions about how to formulate your tax strategy to increase your savings, we can work with you and your tax professional to tailor a plan that’s best suited for your situation.