Student Loans: Calculating 10% of Your Income for IDR Plans

Associates. Welcome back. Let's talk about how you actually calculate a student loan payment that is on one of the IDR programs that limits your payment to 10% of your income. It isn't as simple as saying my tax return showed $200,000, therefore I'm only going to pay $20,000 in my student loans. And I want you to understand how these loans or these payment amounts are actually calculated under the income driven repayment plans like IBR Pay and Repay. Let's look at an example. Your income is $250,000. You have a family size of three. So you're married and you have one child and your student loans are $500,000 and your average interest rate is 6%. You might have multiple rates, but let's just say it's 6%. Or if you consolidated your student loans, it takes the weighted average of all of your loans into the consolidated loan and you have a single rate. Let's say it's 6% and the average. And the term I'll say is 10 years. What I want to show you is how you calculate your IDR payment. And then let's compare it to Your stock standard 10 year repayment plan that you would be paying had you not entered into an income driven repayment program. So the government has this thing called the poverty guidelines. And that's going to be column two in our table. Up above the 2020 poverty guidelines and to the left of that, you'll see how many family members are there in your family. I'm not talking about your mom and dad and brothers. Talking about if you're married and kids. In our example, you got three. So let's look at that third row. The poverty guidelines is the amount of income that the government says. If you're at that income or less, you are essentially considered impoverished. You are below our poverty guidelines. In this case, that's $21,720 for an annual income to a household. Well, the first thing that they do is they simply multiply that number by 150% or 1.5 and that takes 21,720 to 32,580. And why they use 150%, I don't exactly know. But that's the number 150% in every case. And now we're at 32,580.

And then what we say is we have your discretionary income and then we have a 10% of the difference. So what we have.

Is 217,420. What that is is the difference between your 250,000 and the 150% of the 2020 poverty guideline. So 150% is 32,580.

If you subtract that 32,580 from your $2,250,000 of income, you get this thing that the government calls your discretionary income, and that's 217,420. And from there now we multiply that number by 10% to get what is the max that you will pay in your student loan payments for the year. In this case, $21,742 on a monthly basis. That's $1,812.

And so it's actually not 10% of your 250,000. So if you get a W2 for working in a dental office and it says 250,000 on box one, you might be thinking, oh, I got to pay $25,000. Not true. Because we get to deduct 150% of the annual poverty guidelines, and in this case that's 32,580. So once you deduct that, you now you're at 217. So your discretionary income for purposes of multiplying that 10% against will always be less than what your actual pay is. So now looking down at the bottom, let's compare that against a standard 10 year repayment plan. The standard 10 year repayment plan under those loan details on the left, 500,000 6% 10 years is $66,612 or $5,551 on a monthly basis. But under the Income Driven Repayment Program, Pay repay or IPR, you are paying $21,742 for the year or 1,812. That is a dramatic difference that you are paying. And so that's great. That's why we have the IDR programs is the government is saying, look.

We'Re going to make sure that you don't have to use so much of your income to pay for your student education that you're not going to be able to live. We're going to cap it at 10%. But remember on all of these different programs, IDR pay and repay, that you are accruing interest which could then capitalize, but you are adding interest, so your balance is going to be going up. So even though we might like that low payment, remember there are consequences. Now you know from my prior module that I want you to be on an IDR program in the early years before buying a house and a practice in order to keep your monthly debt obligations low to qualify you for buying a house and a practice and maybe a building that you're practicing in, etc. And that's okay even if your balance is going up, whether you should be on Pay or repay or ibr. Typically it's payer repay really as a function of your context, which we spoke about that in a different module as well. But this is how you calculate your 10% of your income in determining what your IDR payment is.