You probably already know this, but let me say it here so we're all on the same page:
Your monthly payment under an income-driven repayment plan lasts for 12 months.
Although it may be obvious to you, I meet way too many borrowers who think that just because their payment is $0 this year, it’ll stay that low throughout their repayment period.
With that clarity in place, let’s talk about student loan recertification and, more importantly, what to do if you can’t afford your new payment.
What is Income-Driven Repayment Recertification
Income-Driven Repayment recertification describes the process you must complete each year to get a monthly income-based payment for your federal student loans.
Unlike private student loans, the government bases your monthly payment on what you can afford to pay.
The government calculates what you can afford to pay by looking at 4 things:
- Your adjusted gross income (AGI)
- Your marital status
- Your family size
- Your state of residence
With recertification, you typically won’t be changing repayment plans. You’ll simply be confirming your current financial situation so your discretionary income can be determined, and, in turn, use that amount to calculate your payment under your income-driven repayment plan.
When to Recertify
Ideally, you should recertify your income about 5 weeks before your current 12-month repayment period ends.
The rules say you must submit your annual income documentation no more than 35 days before your annual recertification date.
Whether you follow that timeline depends on things like:
- what your current financial situation is compared to last year
- whether this year’s AGI on your income tax return is higher or lower than last year’s AGI
- whether your marital status has changed or will change
The answers to those questions matter because they help determine what your new monthly payment will be. I imagine, like many student loan borrowers on under IDR plans, you want to keep your monthly student loan payments as low as possible.
If that’s true for you, then timing when you recertify may make all the difference in what your next 12 months of loan payments will look like.
What Happens If You Don’t Renew by the Annual Deadline?
You have until the due date for your 12 monthly payment to submit your recertification paperwork.
What happens next depends on when you submitted your paperwork and which repayment plan you’re under.
Let me explain.
IBR + PAYE borrowers
Assume you submitted your recertification request 10 days before your repayment period ends, but your student loan servicer hasn’t calculated your new monthly payment. Under that scenario, your loan servicer must keep you at your current payment amount until they calculate your new monthly payment.
You can stay in the IBR + PAYE plans even if when you recertify you no longer have a partial financial hardship.
If your new monthly payment amount is less than your old amount, the loan servicer will refund the overpayment to you. But if the new amount is higher, then you won’t be responsible for the underpayment.
Now, let’s assume you submit your paperwork after your recertification date. Under that scenario, the first thing that will happen is that your loan servicer will assumer your family size is 1 for the upcoming year.
REPAYE student loan borrowers
Here’s what happens if you submit your Revised Pay As You Earn recertification request 10 days before the recertification date but your loan servicer hasn’t calculated your new payment.
First, your servicer will remove you from the REPAYE plan.
Second, your servicer will place you on an alternative repayment plan. The alternative repayment plan sets your monthly loan payment at an amount necessary to pay your loan in full within the earlier of:
- 10 years from the date you began repayment under the alternative repayment plan or
- The end of your 20- or 25-year repayment period under the REPAYE plan.
Finally, your servicer will add any unpaid interest to your principal amount (capitalization) thereby causing your loan balance to increase by a lot.
Having your student loan debt increase, by itself, is a huge problem. But it’s not the only problem. The other, more distant problem is when you get income-based student loan forgiveness after 20 to 25 years of payment. When that happens, you’ll have to pay income tax on the remaining balance that’s forgiven. This can cause your income tax liability to increase substantially.
Income Contingent Repayment Plan Borrowers
Let me start with this:
No borrower with a Direct Loan (unless it’s a consolidation loan of a Parent Plus Loan) should be paying their student loan debt under the ICR plan. As I’ve said elsewhere, the ICR plan is the worst of the IDR repayment options and should only be used if you have Parent Plus Loans.
Okay, with that disclaimer out of the way, let’s talk about the recertification process for the ICR plan.
How do you apply for recertification
The easiest way to apply for recertification is to use your Federal Student Aid ID to login to studentloans.gov.
The studentloans.gov website allows you to complete the recertification process online. It even connects with the IRS’s website so you can easily grab your taxable income for last year.
Although that process is easy, it’s not the best way to complete the recertification process in my opinion.
With my clients, I always submit the paper application. I do that for two reasons.
First, I want to have a paper record of what they applied for and when they applied. Things happen. And student loan borrowers get screwed over. If that happens, I want my clients to have easy access to evidence that supports what they did or didn’t do in terms of their student loan repayment.
Second, I want to have greater control over the process. The recertification application asks a lot of technical questions, the answers to which can have great effect on your monthly payment.
In an effort to make recertification easy, the online application provides prompts and cues to help you complete the application. Sometimes those prompts and cues can be confusing I find that with the paper application, my clients can more readily understand what’s being asked of them and then answer truthfully.
So should you submit an electronic or paper IDR recertification request form? That answer depends on what you value.
How is your monthly payment calculated
Your new monthly payment is calculated based on your adjusted gross income, family size, marital status, and state of residence.
Each repayment uses that information slightly differently to calculate your discretionary income.
For instance, under the PAYE and IBR plans, your spouse’s income will be used to calculate your payment amount only if you filed taxes jointly. But under the REPAYE plan, unless you don’t have reasonable access to your spouse’s income, your spouse’s income will be used no matter how you filed your taxes.
Once your discretionary income has been calculated, each repayment plan takes a different percentage of that income to determine your new monthly payment.
What to do if your payment is higher after recertification
When your new monthly loan payment is a lot higher than it was last year, the first thing to do is to check your income.
What I mean by that is check to see what income information you provided to your loan servicer last year and then compare it to what you used this year.
Was your AGI a lot lower last year than it is this year?
Did you use a paystub last year? If so, were you earning less then? Or check to see if the income information you used this year included a bonus or some other money you don’t ordinarily get.
Did you use a tax return this year? Did you get a dividend from stocks? Sell a property? Inherit money? Basically, was there any extra income on your tax return that artificially increased your AGI?
After you check your income, make sure you accurately counted your family size. Remember, family size for student loan purposes may be different than the dependents you claim on your taxes.
If you find a difference in your income or family size, contact your loan servicer and ask that your monthly payment be recalculated early.
The absolute last thing you should do is request a deferment or forbearance.
Recertification and Public Service Loan Forgiveness
Student loan borrowers that work full-time in a public service job or at a nonprofit definitely need to make sure they timely submit their recertification paperwork or else they risk missing months towards loan forgiveness.
With the PSLF loan forgiveness program, a loan borrower can have her Direct Loans forgiven after making 120 monthly payments under an income-driven repayment plan.
Failing to timely recertify extends the time you need to work and make payments before your loans are forgiven.
I don’t know about you, but if I can avoid paying extra towards my student loans, I’m going to take that option every time.
So do yourself a favor, mark your recertification date in your calendar, and set a reminder for 40 days from that date to submit your recertification paperwork.