EDU Loan Support

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.