Tipping the Scales on Income-Based Repayment Eligibility

A lot can happen in one year.

A new job, a marriage, a newborn baby, a big promotion -- all these major life events can have a massive effect on borrowers' daily lives, salaries and -- if they are enrolled in an income-based repayment plan -- their student loan payments.

This time of year marks the anniversary of when many college graduates began repaying student loans, right at the end of their six-month grace periods.

Those who enrolled in an income-based plan during that time are engaged in the annual process of submitting their latest financial information to determine future monthly payments, usually capped at 10 percent or 15 percent of discretionary income, depending on the plan available when they entered repayment.

Sometimes, after years of making income-based payments, a spike in salary can boost borrowers beyond the income-to-debt ratio that initially qualifies them for income-based repayment. And when it comes time to resubmit financial information, they may wonder whether they can continue to pay on an income-based plan.

The short answer is: Well, sort of. Here's the inside scoop.

In order to qualify for Income-Based Repayment or Pay As You Earn, a student's debt must be high enough compared to income that the student will pay less under an income-based plan than under a standard 10-year repayment plan.

New graduates, curious to see whether they qualify for income-based repayment, can plug their information into the Department of Education's repayment calculator.

Note that this advice doesn't apply to income-contingent repayment, which is typically a less generous plan and has its own set of guidelines.

A variety of life changes can cause a person's income-to-debt ratio to cross the income-based threshold.

One reason might be a big promotion or a new job, which could make a borrower's salary so high that debt is no longer a substantial portion of income.

A marriage may be culprit if the couple decides to file taxes jointly. "Marriage is the most common reason we see," says John Collins, managing director of GL Advisor, a financial advisory firm for advanced degree professionals with student loan debt.

Graduates may tip the scales while riding the wave of an improving economic climate. Many recent college students graduated into tough economic times, filled with unemployment or underemployment, and are now finding better-paying or full-time jobs and are able to afford the standard 10-year amount.

If a borrower's payments under Income-Based Repayment or Pay As You Earn increase to more than what the borrower would pay under the standard 10-year plan, then the borrower pays the amount that would have been owed under the 10-year plan when repayment first began.

Simply put, the amount owed under the standard 10-year plan acts as a cap on monthly payments.

When income is too high, "the payment amount is no longer calculated as a percentage of income and, at that point, it is a benefit to the borrower," says Heather Jarvis, an attorney specializing in student loans. But keep in mind, says Jarvis, that income-based borrowers aren't forced above the standard 10-year amount but can choose to exceed it if they accelerate repayments to tackle debt faster.

While a change in income may cause monthly payments to no longer be tethered to salary, borrowers are still enrolled in the same income-based plan and can still qualify for loan forgiveness, says Chopra, of the Consumer Financial Protection Bureau.

Someone working toward the 10-year forgiveness benefit of Public Service Loan Forgiveness, for example, can still plan on the federal government forgiving that debt after the requisite 120 on-time payments.

And if a borrower's income dips back down in the future, or the borrower has a child, monthly repayments may sink back down below the 10-year plan payment threshold and the borrower may be eligible to tie payments to income once again.

While making too much won't get someone thrown out of the plan or affect eligibility for loan forgiveness, there are other ways to lose the option to make monthly payments based on income. "If you don't document your income every year, your servicer could boot you out of an income-based payment," says Jarvis. You'd have to submit income documentation -- and meet the income-to-debt requirement again -- to get a payment based on your income again, she says.

So, for borrowers settling into a new job, new marriage or living with a newborn: Congratulations, and relax. Monthly payments are capped at the amount owed under the standard 10-year plan. Just find a minute to get that paperwork in on time.

President Obama extended eligibility for an income-based monthly federal-student-loan repayment program

By executive order, President Obama extended on Monday afternoon eligibility for an income-based monthly federal-student-loan repayment program to all holders of student debt. The move expands the number of student-loan debtors qualified for the monthly pay cap by about five million.

Weighed down by more than a trillion dollars of student loan debt, millions of young Americans are struggling to find jobs their costly college educations were supposed to provide, which is why President Barack Obama is expected to announce Monday an expansion of current programs aimed at reducing the burdens of federal student loan borrowing.

The plan would broaden the number of young student loan debtors who would qualify for monthly payments capped at 10 percent of discretionary income under the “Pay As You Earn” (PAYE) program. Remaining debt for many of these borrowers also would be forgiven after 20 years for private sector workers and 10 years for government workers and employees of some nonprofit organizations.

The details are similar to those outlined in the White House’s 2015 budget proposal (pdf) at a cost of $7.3 billion between 2015 and 2019. The president will be answering questions on Tuesday about student-loan relief submitted though the Tumblr microblogging site.

Under the current five-year-old Income-Based Repayment Plan, federal student loans can be adjusted annually based on changes to income and family size and are capped at 15 percent of income after basic costs of living are paid, known as discretionary income.

Starting next month borrowers with financial hardship will be eligible for the 10-percent monthly repayment cap. Obama’s proposal would remove the financial hardship requirement.

Federal student loan debtors who began making debt payments after October 2007 are eligible for some debt forgiveness under the Public Service Loan Forgiveness program. Civil service agencies can also repay federal student loan debt as a recruitment and retention incentive.

The Education Department estimates that the number of debtors that joined the Income Based Repayment Plan increased 24 percent to more than 1.6 million in the first quarter.

“The recession brought a sudden reversal in this relationship. As house prices fell, homeownership rates declined for all types of borrowers, and declined most for those thirty-year-olds with histories of student loan debt,” according to an article on the New York Fed’s blog “Liberty Street Economics.”

In the article, the Fed’s senior economist Meta Brown points out that in the years after the 2007-2009 Great Recession, young Americans without student loan debt were more likely to have a home mortgage by the age of 30 than those with student loan debt. Before that, young Americans with student loan debt were more likely to take out a mortgage by the age of 30 because they tended to out-earn Americans without student-loan debt.

But now more college graduates are working in jobs that don’t require college diplomas and are earning less, according to a Fed study from earlier this year (pdf).

“In recent years, the economy has grown annually at 2 percent or so,” an editorial in Saturday's New York Times said, which points out that young Americans who have entered the workforce since the end of the last recession are facing increased economic hardship. “That’s too slow to make up the current shortfall of nearly seven million jobs, let alone to absorb new graduates or push up wages in jobs that do exist.”

In the first quarter, total U.S. student loan debt increased by $31 billion, breaking through $1 trillion for the first time, according to the Fed’s Household Debt and Credit Report in May.

How You Might Qualify for Student Loan Forgiveness

In its report, "Searching for Relief," the NCLC found numerous problems, including: charging for services that are available for free; failure to disclose fees online or when initially requested; and providing inaccurate information about crucial topics such as consolidation loans and garnishment.

Most of these companies claimed to offer a broad range of services, but NCLC's secret shoppers didn't find that. They're not a counseling service, and they don't usually go through all the options available. They're usually selling loan consolidation, so they are going to steer you in that direction, no matter what." Loan consolidation is a good option for some people, but it doesn't work for everybody and may not be available to all borrowers.

NCLC's mystery shoppers also found that some companies charge a monthly fee that ranges from $20-$50 on top of the steep upfront payment. The report calls these fees "particularly suspect" since it's unclear what service, if any, the customer is buying on a monthly basis.

People are looking for debt relief, but they don't know where to get help. That enables companies to charge them for something they could do on their own for free. And while that's not illegal, it is against the law to make false claims about the nature of the service or lie about being affiliated with the government's Direct Loan Program.

Students should receive better counseling about their loan repayment options—especially students who are about to drop out of school. Dropouts are four times more likely to default and represent about two-thirds of the loan defaults, he said.

Students can consolidate their loans on their own for free at StudentLoans.gov. In 2008, Congress decided to require a similar notice for companies that charge to prepare the Free Application for Federal Student Aid (FAFSA) form, he noted.

Last week, Illinois AG Madigan told a congressional committee that these scams are the result of a larger problem—too many former students are having a hard time paying down their student loan debt. At the very least, she said, the Department of Education should create a public awareness campaign to get the message out to current and former higher education students that there are programs available that can help them.

"The scammers have advertisements and these advertisements are working," she testified. "We need ads highlighting real programs to counteract them."

The U.S. Education Department provides borrowers with information about their options and federal programs that might be able to assist them with repayment.

Do your homework before you do anything. Start with free options and be highly skeptical of any company that charges a fee and requires payment in advance. "Watch out for companies pretending to be blessed by or vetted by the federal government and watch out for companies that pretend to be part of a public repayment program.