Income-Driven Repayment: An antidote to high student loan payments

For those pursuing Public Service Loan Forgiveness (PSLF), successfully navigating repayment plans is essential to maximize the program’s benefits and your savings. As a borrower entering repayment on your student loans—unless you’ve just consolidated a large amount of loans—you’re placed on the standard 10-year repayment plan: your monthly payment is calculated so that after 10 years of paying the same amount, the balance is paid off. While this is the simplest plan, it can cause major problems, primarily because those with large loan balances are expected to make several-thousand-dollar payments each month regardless of their actual incomes.

Income-driven repayment (IDR) plans address this problem by basing the borrower’s monthly payment on their discretionary income: your taxable income less 150 percent of the poverty level as determined by the U.S. Department of Health and Human Services. If you can demonstrate a Partial Financial Hardship (PFH)—which simply means that you don’t earn enough money for the standard 10-year monthly payment to be feasible—you’re eligible. That eligibility remains for the life of the loan, regardless of any changes to your income. The downside of these plans is that they can drag out repayment from 10 years to 20 or 25, and if the loan still isn’t paid off, it’s forgiven, leaving a big tax burden.

Enter PSLF: for those working in public service jobs, they can reap the benefits of an IDR plan and have their balance forgiven after just 10 years without the tax liability. Perfect, right? Well … the PSLF program has suffered from a lot of mismanagement over the years, and includes some complex annual paperwork that can be tricky to navigate alone.

Avoiding IDR Pitfalls

Income recertification is one of the most common facets of IDR plans that causes people to trip up, and for good reason. Under these plans, you have to submit an annual form showing how much you’re regularly earning: your servicer uses your most recent tax return or a pay stub to calculate your monthly payments. Unfortunately, servicers don’t always manage this process this effectively, and the CFBP has found numerous instances of potentially intentional fraud, usually concerning calculation of payments and eligibility for PSLF.

Last week we shared the experience of Dr. Elliot and his struggle after his servicer mistakenly informed him he no longer qualified for his IDR plan. While he was in residency, Dr. Elliot enrolled in an IDR plan (Pay As You Earn [PAYE]), which based his monthly student loan payments on 10% of his discretionary income. Since his income as a resident was modest, he was able to demonstrate a PFH, which qualified him for the plan. When he became an attending, and his income increased greatly, he was able to stay on the plan because he enrolled before he crossed the income threshold, and remains eligible for the life of his loan. His servicer, however, mistakenly informed him that since he no longer had a PFH, he no longer qualified for PAYE and had to change plans—they were wrong. Fortunately, after informing the servicer of their mistake, Dr. Elliot was ultimately able to change to PAYE Uncertified Payments, a qualifying plan for PSLF and one that caps his payments.

Mind the Cap: What to do when your income exceeds the PFH

On most IDR plans, high-earning borrowers have the benefit of the payment cap, which prevents their monthly payments from becoming unmanageable. Under PAYE and IBR (Income-Based Repayment, another plan), your payment is capped at the amount that you would have originally paid under the standard 10-year plan. That means that if you start out at a low income and demonstrate a PFH—allowing you to enroll in an IDR plan—your payments will go up if your income does, but will never exceed that standard 10-year amount. The exception is REPAYE, which has no cap, and your monthly payment will continue to increase in proportion to your income.

The payment cap means that high-income public workers, like physicians, can still enjoy the benefit of PSLF as long as they get on the right IDR plan at the right time. Dr. Elliot had the right strategy: he got on the PSLF track while he was a resident and enrolled in PAYE before his income shot up as an attending. With the cap, his monthly payments should have never exceeded $2,960, which was his original standard 10-year payment amount. Without the cap, under REPAYE—for example—his payments would be $3,170 based on his household income  of $450,000, and would continue to increase as his income did.

Oftentimes, we and our clients have to correct mistakes made by loan servicers, and having your payment plan messed with can be one of the most detrimental. If your loan servicer tells you that you no longer qualify for your plan, they’re wrong. When you enroll in an IDR plan, it’s “‘til death do you part,” or—to put it in a more positive light—“‘til PSLF do you part.” Have no fear, give us a call, and we’ll help you ride the cap all the way there.