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You're our top priority.
We want you to be able to make decisions about your student loans with confidence. We offer objective, independent, straightforward guidance on student loans and refinancing lenders. While our site doesn't answer every question or have every lender, we are proud to provide the information and tools you need — free of charge — to make the best decisions for yourself. So how do we make money? We get paid in two ways. First, you can hire us to develop a student loan strategy for you and implement that strategy on your behalf. Second, our partners compensate us. This may influence which refinancing lenders we write about, but it doesn't affect our recommendations or advice. Our partners cannot pay us to guarantee favorable reviews of their products or services.The income-driven repayment plan regulations don’t define “significant change in income”. Neither does the IDR application. Instead, the current version of the application asks single borrowers whether their income “significantly decreased, or [their] marital status changed” since they filed their last federal tax return (Item 11), and asks joint filers only whether their income “significantly decreased” (Item 13). After that, it provides examples:
job loss
drop in income
divorce
separation after filing a joint return.
While those examples are great, they don’t help us understand the adverb “significantly”. Is it significant if your income decreases by $1 thousand? What about $10 thousand? Or $30 thousand?
In my opinion, instead of trying to establish a dollar amount threshold to say this change in income is significant or that change in income is significant, the better test is to ask “how will my payment change if I use a pay stub versus the adjusted gross income on my federal income tax return?”
Normally, your loan servicer uses your adjusted gross income and family size to determine your discretionary income, and, in turn, calculate your monthly payment.
When you use a pay stub as income documentation, that formula changes. Your servicer stops working from the adjusted gross income on your return and builds the figure from the taxable income your documentation shows. A pay stub carries none of the above-the-line deductions that reduce your AGI when you file, so the figure can land higher than your AGI even when your earnings have fallen. If it does, your discretionary income is higher, and your monthly payment is higher — the exact opposite of what you want.
Related: Alternative Documentation of Income: When a Pay Stub Beats Your Tax Return
Learn More: Who Do You Contact If You Have Questions About Repayment Plans?
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Advertiser Disclosure
You're our top priority.
We want you to be able to make decisions about your student loans with confidence. We offer objective, independent, straightforward guidance on student loans and refinancing lenders. While our site doesn't answer every question or have every lender, we are proud to provide the information and tools you need — free of charge — to make the best decisions for yourself. So how do we make money? We get paid in two ways. First, you can hire us to develop a student loan strategy for you and implement that strategy on your behalf. Second, our partners compensate us. This may influence which refinancing lenders we write about, but it doesn't affect our recommendations or advice. Our partners cannot pay us to guarantee favorable reviews of their products or services.Fraud considerations
In 2019, the Government Accountability Office reviewed over 76 thousand IDR applications from borrowers seeking to pay their student loan debt under a repayment plan based on their income.
In their review, they found a sizeable amount of borrowers who reported have zero taxable income, likely had some income during the repayment period. As a result, they recommended the Department of Education implement processes to check the income a borrower self-reports.
What if your income increases?
No matter if you’re in the IBR plan, PAYE plan, the Repayment Assistance Plan, or, if you have a Parent PLUS Consolidation Loan, the ICR Plan, the only time you have to report an increase in income is when it’s time to recertify for the next student loan repayment period. Before then, you’re under no obligation to report increases in income due to bonuses, raises, commission, etc.
Related: PAYE vs RAP: How the Two Plans Compare
The same is true if you got an inheritance during the year. You don’t have to worry about an inheritance affecting your monthly payment amount — at least not until it’s time to recertify.
When that time comes, recertification, the question you’ll have then is how do you keep your loan payment low when your income increases?
Here’s what I do when student loan borrowers reach out to me for help.
Dealing with Increased Income at Recertification
When I know their income has increased or will increase when it’s time to recertify, I have them hold off on filing a new federal income tax return. By doing that, it allows me to analyze whether it’s better to use the previous year’s tax return.
If it is, cool. We’ll use that as a proof of their income.
But if it isn’t, then I have them prepare a draft of their current federal income tax return. That way we can get an estimate of their new AGI and their tax liability.
I also start looking at their paystubs. Are they salary? Is their gross income consistent check to check?
Basically, I’m seeking to explore all options for trying to get the lowest monthly payment I can get for their student loans.
UP NEXT: How to Recertify and Get a Lower Student Loan Payment
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