The Consumer Financial Protection Bureau (CFPB) has accused student loan servicers of failing to enroll borrowers into income-based repayment programs. As a result, borrowers are paying more than they have to and defaults have increased. You may have multiple options to lower student loan payments. Income-driven repayment programs tie monthly payments to a percentage of your discretionary income.
Your options for participating in these programs vary depending on the types of loans you have and when they were dispersed. The first step to seeking lower payments is to use the Department of Education’s National Student Loan Data System (also known as the NSLDS). After logging in, you should see the types of loans you carry and information on your loan servicers. More details may be available on the top portion of your Master Promissory Note (MPN) for your loans.
What Are the Eligibility Requirements for the IBR Program?
There are several requirements to enroll in the income-based repayment (also known as IBR) program.
- You must show partial financial hardship to qualify for the IBR program. This means your monthly payments under the program must be less than what you would pay under a standard 10-year repayment plan.
- You must have Direct or Federal Family Education Program (FFEL) loans to qualify. If you have FFEL loans, the IBR program is your only option for tying monthly payments to your income unless you receive a Direct Consolidation Loan.
- To qualify for the IBR program, your loans cannot be in default. However, you can rehabilitate defaulted loans to qualify for this program. We encourage you to read our newsletter on how to get your student loans out of default.
- Parents PLUS Loans do not qualify for the IBR program (under both the Direct and FFEL programs). PLUS Loans made to graduate or professional students are eligible.
- Perkins Loans do not qualify for the IBR program. However, you can seek a Direct Consolidation Loan to qualify.
After you are enrolled in the IBR program, your monthly payments will be capped at 10 to 15 percent of your discretionary income.
What Are the Eligibility Requirements for the REPAYE Program?
The Revised Pay As You Earn (REPAYE) program expanded eligibility to more people. Eligibility requirements for REPAYE are not as strict as they are for IBR or the classic Pay As Your Earn (PAYE) programs. Unlike IBR, you are not required to show partial financial hardship. You do have to meet the following criteria:
- You must have Direct Loans (subsidized or unsubsidized) or Direct PLUS Loans made to graduate or professional students. Direct Consolidation Loans may also qualify.
- You cannot qualify for REPAYE if your loans are in default.
- If you have FFEL or Perkins loans, you are not eligible for REPAYE. However, you can request to convert your loans into a Direct Consolidation Loan to become eligible.
What Options Are Available if You Do Not Qualify for IBR or REPAYE?
If you are not eligible for IBR or REPAYE, you may have several options. You might be able to consolidate FFEL and Perkins loans into a Direct Consolidation Loan. If you have Perkins Loans, you must consolidate at least one Direct Loan or one FFEL loan. This option could allow you to become eligible for the REPAYE or IBR programs. The REPAYE program has more generous repayment options, so this may be the best choice.
If you have Parents PLUS Loans, your only option is to consolidate and enroll in the Income-Contingent Repayment program (ICR). This option caps monthly payments to 20 percent of your discretionary income. You can also qualify for the Public Service Loan Forgiveness (PSLF) program if you convert your Parents Plus Loans into a Direct Consolidation Loan and then make payments through the ICR program.
How Do You Enroll in IBR or REPAYE?
Both the IBR and REPAYE programs require you to send the Department of Education information on your income and family size. This information must be updated every year. First, you must submit an application for either program to the Department of Education. Second, the Department of Education may require you to submit income information directly from the IRS.
The Department of Education will send your application to your loan servicer after you have applied. It may take several weeks before your loan servicer revises your repayments. You ask your servicer to enter forbearance on your loans while the application is being processed. Depending on your servicer, they may temporarily place your loans into forbearance without a request.
Are There Downsides to Income-Driven Repayment Programs?
One of the major benefits of IBR and REPAYE is that borrowers receive loan forgiveness after making timely payments for 20 or 25 years. However, the amount forgiven is considered taxable income unless you are enrolled in the Public Service Loan Forgiveness program. If you are not enrolled, it is possible to be hit with a tax bill after your loans are forgiven.
Another downside is that you must recertify your income-driven repayment plans annually. The Department of Education requires you to send information on your income and household size each year so it can readjust your monthly payments. If you miss the recertification deadline, or your servicer does not process your request in time, you can revert back to a standard 10-year repayment plan. In some cases, borrowers may see their monthly payments increase by several hundred dollars with little warning.
Research your options carefully before moving forward with any major changes to your student loan payments. IBR, REPAYE, PAYE and ICR are most useful for people who are struggling to make monthly payments under a 10-year plan.
The Kansas City student loan attorneys at The Sader Law Firm can help you look at options for managing excessive student loan debts.