Student Loans: Income Driven Repayment Plans (IDRs)

Welcome back, associates. This particular module is an important one because we're going to talk about the income driven repayment programs. And there's three main ones I want to talk about, even though there's a fourth. There's three main ones I want to talk about and they're, they are the income based repayment plan, the pay as you earn plan or pay, and the revised pay as you earn plan or repay. The fourth one, which I'm not going to talk about, is called the ICR Income Contingent Repayment plan. And nobody wants that, so I'm not even going to talk about it. Let's try to distinguish between these three types of plans. Let's talk about these features. And in my table, let's go through each column one by one. Let's look at the first column here. Income cap is the income is your income or payment capped and your payment is capped at 10% for all three of your income. And we've spoken about this in examples in different modules. The only exception is, is if you got an IBR that predated 2014, that one would be capped at 15% of your income. That's the only difference. But all IBR loans taken out after 2014, they're all 10% and pay and repay are 10%.

Now, are payments capped at the 10 year payment plan level? Let me explain this. As I've mentioned before, when you come out of dental school, the government says you are by default on a 10 year repayment plan 120 months and they calculate a payment for your student loan, or if you have multiple student loans, like a payment for each of your student loans at the time, or if you consolidate it right at that time, a single payment. But they calculate a payment that is equal to 10 years and let's say that payment is $4,000. Well, they sort of put that in their back pocket and they remember that number. Because under two of these programs, IBR and pay, you will never pay more than that $4,000. You will never pay more than that $4000. However, under repay, if 10% of your income is more than that $4,000 a month, then you will pay 10% of your income. So if 10% of your income, let's say you're at $600,000 of income, 10% of that is $60,000, that's $5,000 a month, which is higher than the 10 year standard repayment plan of $4,000 a month. Well, guess what, if you're on IBR and pay, you're still going to pay $4,000 a month. But if you're on repay, you're not capped at that 4,000 and you'll pay the full $5,000 for that month. So you're going to say, well Wes, why would I possibly want to go on repay? Why don't I just stay on IBR and pay? Well, stay tuned, hang in there. We're going to talk about the other features of these three programs. So that's one of the more important ones. And noticed I highlighted the no under the repay no as in your payment isn't capped to 10% of your income. And I've highlighted a few others that I think are critical to understand as well. So if we go to the next column, is hardship required? This is essentially an extension of the second column which is saying that hardship is when 10% of your income is less than that 10 year plan, meaning that if you are paying, if 10% of your income is.

Is less than what your standard 10 year student loan repayment plan is, then you're considered to be suffering a hardship. The government says you're suffering a hardship.

And that's required in order to be on that plan and pay that lower amount. So under IBR and pay, the answer is yes. If you want all the benefits of IBR and all the benefits of paying, then 10% of your income has to be less than your 10 year standard plan because that means you have a hardship. If suddenly 10% of your income is more than your 10 year standard repayment plan, you can still stay on IBR and pay and pay that 4,000 in our example, but you're going to lose some of the benefits of these two plans. And I'll explain that here in a moment. Under repay you, you don't have to have a hardship. You could be making a million dollars a year, $2 million a year, and you can still stay on the repay and get the benefits of repay. So hardship is not required to get the benefits of repay. Let's go on to the next column. When is it forgiven? Well, for IBR and for pay it is 20 years. Now it's 25 years if your IBR was before 2000 and 2014, but after that it's 20 years. So IBR and pay so far in every sense they're identical in all four columns so far. Repay, on the other hand, is forgiven after 25 years. So the government is saying, yeah, we'll give you some benefits, which I'll talk about here and related to your interest subsidy, but you don't get forgiveness until after 25 years. Talking about interest subsidy. Subsidy, as you know, is when part of a financial subsidy, part of a payment is made by somebody else other than you. Well, in this case, the subsidy is the government is going to help pay for some of the interest or at least not charge you, since they're the lenders on this, for some of the interest. And for all three of these, notice that the first three years of all subsidized loans, these are your undergraduate loans that were federal, that were subsidized, Stafford loans that these are, you're not gonna, you're not gonna pay the interest on it for those first three years. The government will. But all other loans, your graduate unsubsidized loans or any undergraduate unsubsidized loans, you don't get that benefit. And some people think, oh, all of my loans get three years of no interest. Not true. That's only applicable for your undergraduate subsidized loans. After that, your interest starts to accrue. So here's where we start to see some real differences, even between IBR and pay. Because under IBR.

All other interest that you don't pay because 10% is so low of your income that you don't even pay all your interest portion of your payment, that difference continually gets added to the balance of your loan that's under ibr. Under pay, the same thing happens, except there's one difference. Remember in my other module that I talked about accrued interest versus capitalized interest? And in capitalized interest, the interest is you actually have to pay interest in the future on that interest and accrued interest, you don't. Accrued interest sort of goes in the side bucket. Capitalized interest is when you take out of the accrued interest bucket and you put it in the capitalized bucket. And now you're paying interest every year on the full balance, which includes that capitalized interest. Well, the government has said for pay will limit the amount of capitalized interest. So we'll limit the amount that goes from your accrued bucket into your capitalized bucket to 10% of your beginning balance. So if you came out of school with $500,000 and no more than $50,000 of interest, that sort of builds up in bucket number one will be transferred over to bucket number two and be capitalized. And this has created some confusion. Number of clients have said, hey Wes, I'm on pay, but my balance has gone from $500,000 to $700,000. I thought that only 10% of my interest could be added to the balance of My loan, which would be $550,000 max. 500,000 plus 10% of that is 50,550 not true. Accrued interest can add up to a billion dollars. Accruing interest can keep going and going and going, but the amount that becomes capitalized, where you actually pay interest on that interest is limited to 10%. And if you're going on forbearance or deferment.

Or you're switching between IDR plans, the maximum amount that can be capitalized is going to be 10% there and under repay. Here's what I like about repay is that for unsubsidized loans. So we know the first three years for subsidized loans, government's got that covered for all three of these. But for unsubsidized loans, the government will always pick up 50% of that tab. Always. And of the accrued interest, not just capitalized but all interest.

That is accruing. So remember my two bucket analogies in my prior module. All of the interest that you don't pay because 10% is so low that you're not even covering the interest portion of your payments, then only half of that accrued interest goes into the bucket. The other half the government takes care of. And this might be really good. If you're planning to pay off your student loans, why not have the government pick up half the tab during those early years when 10% of your income is low enough that you're actually creating accrued interest? That's what we like about repay. Alright? Do you have to include your spouse's income under an ibr? If you file your tax return as joint, you're married. Typically married people file called a married filing joint tax return one tax return for the two of them. Then you do have to include your spouse's income when calculating 10%. So if your spouse is making 200,000 bucks a year working at a law firm or something and she has or she has no student loans, then he or she is bumping up the amount of your IBR payment. So you could file separately where you each file your own tax return which has certain negative consequences as well. You got to talk to your CPA about that. But if you do file separately, then you only have to include your income. Now if your spouse is staying at home, not working, etc. Or low income or maybe high student loans relative to their own income, it's not really going to harm yours. So few things to consider there for sure on pay. Same thing, you do have to include your spouse's income if you file a joint, but if you file separately, you don't revised pay as you earn Said hey, there's sort of a loophole here that some people are filing separately. We need to make sure that everyone files that everybody both spouses income is considered when determining the amount of the repayment. And so under repay, whether you file separately or whether you file your tax return married filing joint, you're going to include your spouse's income. So repay may not be the best option if you're married to somebody who has a low student loan or zero student loan and a high income. All right, let's look at some times where you may want to use each of these underpay if you plan to stay on an IDR until forgiveness and and you want to keep your monthly payments as low as possible. If your income rises too high, your accrued interest will capitalize. So again we're on pay and you want to keep your student loan payments really low. Just know that if your income goes up a lot then at that point when your 10% of your income equals or exceeds your 10 year standard repayment plan, then all that accrued interest is going to capitalize. We spoke about that in the capitalization and accrual of interest module. However, you can remain on the pay plan so you're not kicked off. You can still stay on it until your full loan is forgiven. If so that's your plan, I want to get my student loan forgiven, then go ahead and stay on pay. And also if you're married to a spouse with a high income and little or no student loans, you can do married filing separately and not include your spouse's income. That might be another motivation to be on pay. Lastly, if you're targeting forgiveness after 10 years from the PSLF program, the Public Service Loan Forgiveness program, it's okay if you you could be on pay because it's okay if you end up having a lot of capitalized interest since it's all going to be forgiven after the 10 year mark. And here's a little preview. Under the PSLF, discharged debt or forgiven student loans is not taxable. So pay is going to be a good one. If you're definitely planning on pslf, but make sure to watch my module on the pslf. There's some really important factors to understand about whether you actually are going to be able to get that forgiven or not. Let's look at repay under repay if you're single and you don't need to worry about a high income earning spouse could be an option there, number two is you believe you'll have a high income and want to pay off your student loans before the 25 year forgiveness. You'll have the least amount of accrued interest under this plan because the government will pay for 50% of it. This is our preferred option since we want our clients to earn strong income and get out of debt. Let's look at ibr. Really the only time to use IBR is if you have loans before 2010 and they're FFEL loans, then really IBR is your only option. Unless you can. If you haven't consolidated your loans and you can consolidate those FFEL loans into a direct loan and then you could do pay or repay. And lastly is income contingent repayment. Never ever. The benefits are worse than the others. No need to be on icr. I don't even know anybody on icr, so I'm not going to waste any time there. Hopefully this helped you have a better understanding of the different characteristics of those three I IDR programs and when one might be appropriate for you over another. Now let me also emphasize that this can get very nuanced and your situation can be very different than others. And there are people out there who consult on these. I want you to be careful about who you go to for consultations. There are a lot of people who will try to get you to pay them to go consolidate your student loans, which is the silliest thing known to student loans because you can go on studentaid.gov and you can consolidate your loan loans in a matter of minutes and it's totally free to do that. But there are some people out there really understand student loans and you may need to consult with them here at practice cfo. All of our CFO advisors have been trained to understand student loans and and to be able to factor in the student loans in your overall landscape of finances. There's a sequence of events and if you watched our module, the overall timeline of events in the life of an associate, you'll sort of see when we recommend maybe getting out of government loans into private student loans as well. There's a lot there. So this didn't fully answer your question, which probably didn't. If you have more of a complicated nuanced situation, then reach out to a student loan consultant. Studentloanplanner.com is a good one. We're here to help you as well and you'll get through it.