How to apply for an income-driven repayment plan if your student loans are crushing you

Alexis Rhiannon

Mar 28, 2020, 04:37 IST

How to apply for an income-driven repayment plan if your student loans are crushing you

Thomas Barwick/Getty Images

The coronavirus outbreak has forced businesses to shutter across the country, and many workers' incomes have been reduced or eliminated completely.
If you're paying off student loans and your monthly payment has suddenly become unmanageable, you may want to apply for an income-driven repayment plan.
While you'll get a six-month break from payments under the federal government's relief package, you'll be expected to start making payments again after that and may want to lower them in the meantime.
There are several reduced-payment options for federal student loan borrowers who meet the income and family size requirements, including income-based repayment and pay-as-you-earn plans.
Read more personal finance coverage.

As the coronavirus bears down on the United States, many Americans are already feeling the financial squeeze, and that's especially true for anyone in the midst of paying back a student loan. If you're suddenly working reduced hours or have lost your job entirely, that previously manageable monthly payment might be looking a lot higher these days.

Under the federal government's relief package, you'll get a six-month break from student loan payments and your loans won't accrue interest. After that, though, payments will start up again, and you might not be ready to keep paying the amount you've been shelling out up to this point.

The good news is, there are ways to reduce your monthly payment if you have federal loans. If your current monthly payments eat up a lot of your income, or you have dependents, you may qualify for an income-driven repayment plan.

Choosing one of these plans could significantly reduce your monthly payment - potentially even bringing it down to zero - and the application process is quick and easy, so it's absolutely worth considering.

We'll walk you through the pros and cons below, and give you an idea of the basic process of how to apply for an income-driven repayment plan.

What is an income-driven repayment plan?

First thing's first - what are we even talking about here? Once you graduate and it's time to begin payment on your federal loans, the federal government will automatically set you up with the Standard Repayment Plan, a program that consists of 10 years of fixed monthly payments. Meaning your payments don't change relative to your circumstances. (Income-driven repayment is not available on private loans.)

In contrast, income-driven repayment (IDR) plans take your particular income and family size into account when calculating monthly payments. Depending on those factors, you'll pay back 10 to 20% of your income for 20 to 25 years, at which point you'll be eligible for student loan forgiveness for any remainder.

What are the pros?

This is a particularly appealing option for those at or close to the poverty line, who could pay $0 per month and still remain in good standing, as opposed to slipping into deferment or forbearance, or even delinquency or default, which can seriously ding your credit and ultimately lead to the government garnishing your wages.

Also, you'll be reassessed every year, so if your income dips further or you expand your family to include more dependents, your monthly payment can respond accordingly.

And the cons?

Sometimes even people who qualify for IDR don't end up going that route, and it's typically because the ballooning interest caused by shrinking your monthly payments can make it impossible to stay ahead.

That's a big deal because even though you'll qualify for student loan forgiveness if you stick to your on-time monthly payments, the amount remaining will be taxed as income.

Writing for Business Insider last month about why she elected to dip into her savings rather than apply for IDR, Melanie Lockert wrote, "Under current law, borrowers are responsible for paying income taxes on that forgiven amount, which could be a bigger bill than I could handle. Based on calculations, my balance would have more than doubled and I'd have to pay taxes on forgiveness of six figures of debt."

How to apply for an income-driven repayment plan

If you've decided that IDR is right for you, applying is both quick and easy. There are four different types of payment plans:

Revised Pay As You Earn Repayment (REPAYE)
Pay As You Earn Repayment (PAYE)
Income-Based Repayment (IBR)
Income-Contingent Repayment (ICR)

All four are served by the same application, which you can find at the website for Federal Student Aid. The application has to be completed in a single session, so don't start it when you have a bunch of other stuff going on. According to the website, it usually takes 10 minutes or less to apply, and the process is very similar for recertifying your income.

What will I be asked?

You can expect a series of pretty straightforward questions, which we'll lay out below. (And if you're already feeling stressed, not to worry - there's a demo version of the application that you can walk through to see what lies ahead.) But here are the basics of the 2020 application:

Reason for request: Is this your first application, or are you adjusting an existing plan?
Employment information: You'll be asked whether you work for a nonprofit or government organization.
Specifics about your family: Specifically your marital status and number of dependents in your household.
It'll (ideally) grab info from your taxes: Just make sure you aren't off the page for more than 30 minutes during this portion, or your session will automatically expire and you'll have to start the process over.
More on your taxes: You'll be asked about your federal income taxes for the last two years. Number one, whether you filed them, and number two, whether anything in your life has changed significantly since then. (Basically the system is wondering if those returns are a useful snapshot for your current situation.)

Answering the above information should take you to the Repayment Estimator, which asks for your Current Loan Balance, your Adjusted Gross Income (AGI), which you can find on IRS form 1040, 1040A, or 1040EZ, and the state you live in.

Once you input all that, you should be informed about which of the four plans you qualify for, and a prediction of your monthly payment for each.

At that point, you can either choose which plans you'd like to be considered for, or click a box that says you'd prefer your loan holder to place you on the plan with the lowest monthly payment amount. (Your loan holder will make the same judgement call if you ask to be considered for plans you don't qualify for, choosing the lowest one available.)

From there, it's just some standard contact info and the best times to reach you, a quick review of the information you're submitting in your application capped with a signature, and you're done. Just keep your eye out for a confirmation email from Federal Student Aid, and be prepared to complete those next steps.

Whether to go the IDR route is entirely up to you, of course. But whatever you decide on, don't let the application process intimidate you, because at the end of the day, it's actually quite straightforward and intuitive.

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