Module Number 4 Income Driven Repayment Plans Paul

Income driven plans • Designed for borrowers with significant gap between federal debt and income who cannot afford Standard 10 year plan – Bigger the gap, more likely you need an IDR* • PAYE and REPAYE most popular plans – Semantics are important** • Payments based on income and family size and change annually * Income Driven Repayment plan (the umbrella name for all income plans) ** Income Based Repayment (IBR) is a MUCH older plan; don’t refer to these as IBR

Payment calculation • Payments based on income from most recently filed tax return – Some borrowers get $0 calculated payment their first year after graduation if they file a $0 return or had minimal income • Current income used if significantly less than prior year or no returns filed • Income increases will show on subsequent tax return when you renew (recertify)

Married borrowers • Spousal income counted under all income plans when filing jointly – Spousal federal debt factored into calculation • Only one way to exclude spousal income – File separate return and use PAYE (or IBR) – REPAYE always counts spousal income • Use Loan Simulator* to estimate payments filing jointly versus filing separately * Student. Aid. gov/loan-simulator

IDR pros and cons • Advantages – More manageable monthly payments – May lead to forgiveness • Disadvantages – Payments may not cover interest, if gap between debt and income is high, causing debt to actually grow – You must renew annually – Payments increase dramatically and interest will capitalize if you are late renewing – Term forgiveness subject to tax, unlike PSLF* * Public Service Loan Forgiveness

Once in an IDR • Once in IDR, one of three things will happen 1. Debt forgiven after 120 eligible payments with PSLF* 2. Debt retired out of pocket before end of term • You could also refinance with a private lender 3. Debt not retired by end of term, but forgiven • • We call this “term forgiveness” Unlike forgiveness with PSLF, term forgiveness is considered taxable income the year it is forgiven * You must use an income plan to qualify for Public Service Loan Forgiveness

Takeaways • IDRs provide for manageable payments • Payments change each year • Many borrowers use IDRs not forgiveness, they simply cannot afford another plan • Work with loan servicer to apply for IDRs – Online application at Student. Aid. gov – Do not let loan servicer choose your plan • You can switch plans if needed