The Income-Driven Repayment Plan Request Form requires you to submit proof of your income when you recertify to calculate your monthly payment for your federal student loans.
Typically, you'll use your tax return as that proof. But if you haven't filed taxes in the past 2 years or if your current income is lower than your adjusted gross income, what do you do then?
You submit alternative documentation of your taxable income.
Acceptable alternative documentation of your income includes:
- Pay stubs
- Copies of checks
- A letter from your employer showing your gross income
And if you're self-employed, it includes a letter from yourself showing your gross monthly income.
Alternative documentation can lead to a higher monthly payment amount
The one problem with using something other than your tax return to prove your income is that your loan servicer will use your gross income to calculate your discretionary income.
Here's what I mean.
When you submit your annual recertification or initial Income-Driven Repayment Plan Request with your federal tax return, your loan servicer uses your adjusted gross income to calculate your discretionary income under the plan you chose.
Typically, your AGI is less than your gross income. So if your current income is about the same as the AGI on last year's federal income tax return, you'll likely want to use your return as your income documentation. If not, you could end up with a higher monthly payment amount.
But what if you filed taxes jointly last year and now you're separated?
In that case, you'd want to avoid having your loan servicer include your spouse's income in your monthly payments. To do that, you'll send a copy of your pay stub as your income information. That way, your new loan payment will be based solely on your income.
1. Do I have to have a partial financial hardship to qualify for an IDR Plan?
Both the PAYE plans and the IBR plans require you have a partial financial hardship before you start paying back your loan balance under one of those plans.
In general terms, you have a partial financial hardship if your student loan payments under the Standard Repayment Plan are more than your payments under one of the IDR plans.
Click here to learn What is a Partial Financial Hardship for Student Loans?
2. Do IDR plans offer loan forgiveness?
Each income-driven repayment plan offers loan forgiveness at the end of the repayment period.
The end of the repayment period depends on whether your student loan debt is from undergrad or graduate school.
It does not depend on your outstanding balance.
3. What are the eligibility requirements for the income-driven repayment plans?
The U.S. Department of Education offers 5 repayment options based on your income and family size:
- Revised Pay As You Earn (REPAYE)
- Pay As You Earn (PAYE)
- Income-Based Repayment (IBR)
- Income-Based Repayment for New Borrowers
- Income-Contingent Repayment (ICR)
Most student loan borrowers who borrowed their first student loan debt before 2010, will choose between the REPAYE and IBR plans.
If you borrowed your first federal student loans after 2010, you'd typically choose between the PAYE and IBR plans.
And if you borrowed Parent Plus Loans, the only option you have for payments passed on your income is the income-contingent repayment plan. To qualify for the ICR plan, you'll first need to consolidate your Parent Plus Loans into a Direct Consolidation Loan.
You're eligible for the REPAYE plan if you have Direct Loans so long as none of your Direct Loans were for a Parent Plus Loan.
Parent Plus Loans, including a Direct Consolidation Loan that paid off a Parent Plus Loan, aren't eligible for the REPAYE plan.
PAYE/IBR for New Borrowers
You're eligible for the PAYE and IBR Plan for New Borrowers plans if:
- you're a new borrower and
- you have Direct Loans (so long as none of those Direct Loans were for a Parent Plus Loan)
You're eligible for the IBR plan if you have federal loans made under the Direct Loan Program or the Federal Family Education Loan Program (e.g., Stafford Loans Unsubsidized and Subsidized).
The IBR plan is usually the best repayment option for loans made under the FFEL Program.
If you have loans made under the FFEL Program and you're trying to qualify for the Public Service Loan Forgiveness Program, you have the wrong type of loans. Direct Loans are the only eligible loans for the PSLF program. You'll need to consolidate to qualify.
All federal student loans are eligible for the ICR plan. But the only people who should choose this plan IMO are Parent Plus Loan borrowers.