Douglas Olsen
If you're struggling to afford federal student loan payments, you may be able to lower them with an income-driven repayment plan. These plans calculate payments as a percentage of your discretionary income, which is the amount of income you have left after paying for necessities. To calculate your discretionary income, you must first determine the federal poverty guideline for your location and family size, then multiply this number by 150% (or 100% if you're pursuing the Income-Contingent Repayment Plan). Next, subtract this value from your annual income. This will give you your discretionary income, which you can then use to estimate your monthly loan payments under various income-driven repayment plans. It's important to note that these plans have different formulas, and your payments may change annually due to updates to the federal poverty guidelines.
| Characteristics | Values |
|---|---|
| Basis of calculation | Income-driven repayment plans |
| Factors affecting calculation | The income-driven repayment plan used, family size, location, tax status with spouse, spouse's federal student loan debt |
| Federal poverty guideline | $15,650 for a single person in most states; $21,150 for a family of two |
| Discretionary income calculation | Multiply the federal poverty guideline by 150% or 100% if pursuing the Income-Contingent Repayment Plan; subtract your income |
| Spouse's income inclusion | Considered in most IDR plans if taxes are filed jointly; included in the calculation for the Revised Pay As You Earn (REPAYE) Plan regardless of filing status |
| Payment amount | Generally 10%, 15%, or 20% of discretionary income, depending on the plan |
| Payment period | Monthly |
| Forgiveness | Automatic after 10 to 20 or 25 years, depending on the plan; any remaining loan balance is forgiven |
| Caveats | Longer repayment periods result in more interest over time; income tax may be required on the forgiven loan amount |
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What You'll Learn
Calculating discretionary income
Discretionary income is the money you have left after paying for necessary expenses such as rent, utilities, and groceries. It is the money left for ""discretionary" items and federal student loan debt. It is calculated by considering your family size, state of residence, and federal poverty guidelines.
To calculate discretionary income for student loan repayment plans, follow these steps:
- Find the federal poverty guideline for your location and family size. The federal poverty guideline is released annually by the Department of Health and Human Services (HHS) for the contiguous United States, Alaska, and Hawaii. The guideline measures the federal poverty level for your family size.
- Multiply the federal poverty guideline by the appropriate percentage. Different repayment plans use different percentages. For Income-Based Repayment (IBR) and Pay as You Earn (PAYE) plans, multiply by 150%. For the Income-Contingent Repayment (ICR) plan, multiply by 100%. The Saving on a Valuable Education (SAVE) Plan uses 225%.
- Subtract the result from your adjusted gross income (AGI). Your AGI is the amount you pay taxes on and can be found on your tax return form. If you are married, your spouse's income may also need to be considered, depending on your chosen repayment plan and filing status.
- The final result is your discretionary income. This amount is then used to determine your monthly student loan payments under income-driven repayment plans.
It is important to note that discretionary income is not a one-time calculation. Under an income-driven repayment plan, you need to resubmit your income, family size, and state of residence information annually. Changes in these factors can lead to changes in your discretionary income and, consequently, your monthly payment amount.
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Federal poverty guidelines
The federal poverty guidelines impact the monthly payments for federal student loans when using an income-driven repayment (IDR) plan. The IDR plans calculate payments as a percentage of an individual's discretionary income, which is based on their taxable income, family size, and state of residence. The higher the poverty guidelines, the lower the monthly student loan payments will be for the same level of income and family size.
The VIN Foundation Student Loan Repayment Simulator uses the updated poverty guidelines to help individuals project their future payments under income-driven plans. However, it is important to note that the simulator may show higher payments than actual due to recent higher-than-average inflation, and it is recommended to use a lower poverty growth rate for more accurate long-run projections.
The federal poverty guidelines have separate figures for Alaska and Hawaii, which reflect administrative practices from the 1966-1970 period. However, they are not defined for territories such as Puerto Rico, the U.S. Virgin Islands, American Samoa, Guam, and the Republic of the Marshall Islands. In these cases, the administering Federal office decides whether to use the contiguous states and D.C. guidelines or follow a different procedure.
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Income-driven repayment plans
Income-driven repayment (IDR) plans are designed to help student loan borrowers avoid unaffordable payments when their income is low. IDR plans calculate payments as a percentage of discretionary income, rather than setting a fixed payment for a defined period. Discretionary income is the money left for "discretionary" items after covering the cost of essentials. The calculation considers family size, state of residence, and federal poverty guidelines, rather than personal expenses like rent and groceries.
There are four IDR plans, and each plan has a different cap on monthly payments as a percentage of discretionary income. These caps typically range from 10% to 20%, but one plan, starting in the summer of 2024, will always set payments at 5% of income. IDR plans also vary in terms of the length of the repayment period, with forgiveness occurring after 10 to 20 or 25 years.
The IDR system is currently in a state of flux due to legal challenges and legislative changes. The Biden administration's newest IDR plan is facing litigation, and Congress is expected to resolve the issue through the reconciliation process. The House has passed a bill that includes the Repayment Assistance Plan (RAP), which differs from existing IDR plans. RAP proposes a minimum monthly payment of $10, regardless of income. This is a departure from current IDR plans, where borrowers with incomes below a certain threshold (between 100-225% of the federal poverty line) are not required to make any payments.
The RAP has both advantages and potential drawbacks. On the one hand, it encourages timely repayment and accountability, and borrowers will see their balance decline by at least $10 per month if they make on-time payments. However, for borrowers with stagnant incomes, making only the minimum payment may result in very slow progress in reducing their loan balance, and the extended repayment period may deter some borrowers from choosing this option.
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Family size and location
The larger the family, the higher the baseline poverty level, so it is important to count every person who depends on you, including dependents who are family or friends. This impacts the calculation of your discretionary income, which is used to determine the monthly payment amount for income-based repayment plans.
The Department of Education's formula for discretionary income does not specifically track personal expenses like rent and groceries but considers family size, state of residence, and federal poverty guidelines. This means that a larger family size will result in a higher discretionary income allowance, and thus lower monthly student loan payments.
Additionally, the location of the borrower also plays a role in determining repayment plans. The federal poverty guideline varies depending on the state of residence, which in turn affects the calculation of discretionary income. Therefore, family size and location are key factors in determining the repayment amount for federal student loans under income-driven plans.
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Tax status with spouse
If you're repaying your federal student loans under an income-driven repayment plan, your payment amount may change if you get married. There are several ways to repay your federal student loans, including traditional payment plans and income-driven repayment plans. The latter considers your monthly payment based on your income and family size.
If you're on an income-driven repayment plan, you can either file a joint income tax return with your spouse or file separately. If you file jointly, your combined income will be considered for the plan, and your spouse's federal student loan debt will be factored in. Your payment will be prorated based on your share of the combined federal student loan debt.
On the other hand, if you file a separate income tax return from your spouse, only your income will be considered for the repayment plan. This means that your spouse's income and federal student loan debt will not be included in the calculation. However, before choosing this option, it is recommended to consult a tax professional and consider your total financial situation. Filing taxes separately can make some income-driven repayment plans more affordable, but you could also pay more tax and lose certain benefits.
Additionally, if you are married but separated or cannot reasonably access your spouse's financial information, you can base your payments on an income-driven repayment plan using only your income, even if you filed your last tax return jointly. It is important to note that your spouse's income and tax status will impact your monthly payments on federal student loans but not on private student loans.
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Frequently asked questions
An income-based repayment plan is a way to manage your student loan payments by capping the amount to be paid each month based on your available income. These plans extend the life of the loan but reduce the burden of large monthly payments.
There are four income-driven, or IDR, plans: IBR, PAYE, ICR, and the newly created Repayment Assistance Plan (RAP). Each plan calculates payments as a percentage of your discretionary income.
You can apply for an income-driven repayment plan by submitting an Income-Driven Repayment Plan Request either online or in paper form. You can also apply at studentaid.gov/idr.
