Paying your student loans when you're self-employed can be challenging. Your income isn't predictable, but the payment demands from your loan servicer are. So what do you do?
Well, if you have private student loans, you can ask for an interest-only loan payment. You can also ask for a deferment or forbearance. But both of those options are temporary. If your income doesn't improve over the years, those payment options may run out. And then you're looking at attempting to negotiate a settlement or filing bankruptcy.
Thankfully, getting an affordable monthly payment for your federal student loans as a small business owner is easier. You just need to choose the right repayment plan for your loan type and then produce proof of your taxable income.
You'll learn what's considered acceptable proof of taxable income for self-employed student loan borrowers in this post.
Before we do that, let's go over a few basics.
Student Loan Repayment
The Department of Education offers 5 income-driven repayment plans:
- The Revised Pay As You Earn Plan (REPAYE plan)
- The Pay As You Earn Plan (PAYE Plan)
- The Income-Based Repayment Plan for New Borrowers
- The Income-Based Repayment Plan (IBR Plan) and
- The Income Contingent Repayment Plan (ICR plan)
Not all federal student loans are eligible for each IDR plan. For instance, the PAYE plan requires you to have a Direct Loan and borrowed it after September 2010.
Because of that, make sure you choose the right repayment plan for the type of federal student debt you have.
You can find what type of student loan debt you have by signing into studentaid.gov.
Click here to learn more about Repayment Options for Parent Plus Loans.
How your monthly payment is calculated
Each repayment plan calculates your monthly payment by looking at 3 things:
- Your federal loan balance
- Your family size
- Your discretionary income
The Department compares your loan balance against your income to see if you have a partial financial hardship. Some repayment plans (IBR and REPAYE) require you have that hardship to be eligible for that repayment option.
The Department uses your family size to help calculate your discretionary income.
Let me explain.
The Department takes your family size and looks up the poverty guidelines for the family size in your state of residence. It then multiplies that amount by either 100% or 150% and then subtracts the resulting number from the income documentation you provide. The final number is your discretionary income.
Depending on the repayment plan you chose, your monthly payment will either be 10%, 15%, or 20% of your discretionary income.
Acceptable proof of income
When applying for an IDR repayment plan, you'll have to provide proof of your income.
(Depending on how you filed your income tax return, you may need to provide your spouse's income.)
Click here to read Why Your Spouse Has to Cosign Your IDR Application.
The Department lists acceptable proof of income at the bottom of page 2 of the IDR application.
Acceptable proof includes:
- Your most recent federal income tax return from the past 2 years
- A paycheck from the past 90 days
- A letter from your employer stating your gross income per pay period
- A letter from you stating your gross income per pay period
If your income is consistent year to year, check your payment amount using your income tax return. Your loan servicer will use your adjusted gross income to calculate your monthly payment. Your AGI is your income that remains after you contribute to your 401k and report your business losses. Using your AGI may give you a lower monthly payment than using your gross income.
You don't have to provide proof of untaxed income to your loan servicer, just the income you pay taxes on.
For my self-employed clients, I've used:
- A letter signed by them saying their gross monthly income is X
- Copies of checks they received from gigs in the past month
- Screenshots from their gig accounts (Instacart, Uber, Lyft, etc.)
The rules for providing proof of income are pretty lenient. The critical thing you want to do is make sure your documentation is legible, and you clearly mark how often you get paid. Make the job easy for your loan servicer.
When your income changes
Here's the thing about self-employment income: it changes—a lot.
I tell my friends that owning your own business places you on a roller coaster of emotions. Some moments you think entrepreneurship is the greatest thing ever. The next moment you're ready to die.
The good thing about federal student loans is that when your current income drops, you don't have to worry about how you're going to make your monthly payment.
All you have to do is contact your loan servicer and request your student loan payment be recalculated early due to a change in your income.
You can request a recalculation of your payment amount at any time.
When you do, all you need to do is submit a new IDR application and proof of your changed income. A few weeks later, your loan servicer will contact you with a new payment amount and let you know that payment is good for the next 12 months.
And if your income goes up the next month? You're under no obligation to report your increased income. You can wait until your current repayment ends and then recertify based on your income at that time.
Loan forgiveness for self-employed borrowers
There's no loan forgiveness program for self-employed borrowers.
There are only loan forgiveness programs every other student loan borrower is eligible for:
income based repayment loan forgiveness after 20 to 25 years of loan repayment
Of the 3, the one I get asked the most about by far is the Public Service Loan Forgiveness program.
People want to know, "can I get PSLF loan forgiveness if I own my own nonprofit?"
My answer is, of course, you can. There's no rule against you qualifying for loan forgiveness simply because you own the company. That's not a requirement.
What is a requirement, however, is that you work full-time for a qualifying public service employer and that you receive a salary.
I've found that most people have trouble meeting the last requirement.
Their nonprofit isn't earning enough money to pay them a legitimate salary.
But what if you are a borrower who is earning enough income?
In that case, just make sure you meet all the requirements to keep your nonprofit in good standing with the state and federal government. Do that, and keep making your qualifying payments under your repayment plan. After 120 months of payments, submit your application and wait to get your federal loans forgiven.
Student loan repayment assistance program
The Coronavirus Aid, Relief, and Economic-Security Act (CARES Act) gave some self-employed borrowers an added tax benefit. Under the Act, payments made by the employer towards its eligible employees' student loan principal and interest may be excludable from the employee's income. For the payments to qualify, the payments must be made under an education assistance program.
Under this program, you, as an employer, can give yourself, as an employee, up to $5250 in tax-free student loan repayment assistance during a tax year.
Plus, as an employer, you get credit for a payroll tax exclusion. Basically, the payments made towards an employee's student loans aren't subject to payroll taxes.
Click here to learn How to Create an Employer Assistance Program
Should I refinance
In all my years of doing this, I can think of only one type of borrower (freelancer or otherwise) I have ever advised that refinancing their federal loans with a private lender was a good idea.
That type of borrower? A borrower with a steady, predictable income who can reasonably expect to never be unemployed for longer than a handful of months (aka, borrowers with a traditional job).
Who meets that description? Typically, members of the armed forces and medical professionals (doctors, nurse practitioners, etc.).
For everyone else, I think student loan refinancing is a terrible idea.
Sure, you may get a better interest rate. But you lose too many benefits in the process.