Tips to Lower Your Adjusted Gross Income to Get the Most from Income Based Repayment

The income sensitive repayment plans offered by the federal government for public student loans are based around your family size and your Adjusted Gross Income – otherwise known as AGI. This is a very important number and the lower you can whittle it down, the more modest your monthly payments will be. Income Based Repayment (IBR), Income Contingent Repayment (ICR) and Pay As You Earn (PAYE) are all predicated on this all-important number.

To apply for any of these programs, you must submit information on your adjusted gross income, family size and loan information (balance, interest rate, etc). There are then pre-set formulas – usually on a sliding scale – that determine eligibility and how much your monthly payments will be. In many cases, payments offered can be as low as $0! Check out the following info on AGI to get the lowest possible repayment scenario for your loans.

What Is Adjusted Gross Income? The IRS defines AGI as “gross income minus adjustments to income.” That’s not very specific though, is it? Okay let’s try this way. It’s the income you’ve earned plus any distributions made that qualify as income minus certain amounts that are considered adjustments to income rather than deductions. See on the image below the roster of adjustments that are allowed. Click here for a simple AGI calculator offered by CNN Money. Below are listed some ways you can legally decrease your AGI to make your student loan payments more affordable under the income sensitive plans mentioned above.

#1 Increase Contributions to Your Health Spending Accounts These are those nifty little accounts your employer offers each year where you can sock away pre-tax dollars (i.e. money that’s not subject to FICA or income taxes) that can be used to pay out of pocket medical costs, co-pays and some over the counter medicine costs. The new annual cap for 2013 is $2,500. That’s roughly $208 per month.

If you routinely take medication, have Rx or doctor visit co-pays, these can be paid or reimbursed from this account. Contact lenses, eyeglasses, medical and dental copays, coinsurance percentages or fees, band aids, vitamins, over-the-counter medicines, orthodontia and more are all covered. If you’d be spending anyway out of necessity, it’s wiser to use an HSA so that you reap the tax benefit as well as the benefit of having a lower AGI for income-based repayment consideration.

#2 Increase Contributions to Retirement Contributions to 401(k) plans and Traditional IRAs can both be made with pre-tax dollars. This means that you’ll be lowering your AGI by tucking away money for your retirement. If you are eligible for a tax-free forgiveness program such as teacher, nursing, military or other public service loan forgiveness (PSLF), you want to minimize your AGI so you’ll pay in the least amount prior to your forgiveness threshold.

Imping up your retirement contribution not only benefits you in the short-run (particularly if you’re a PSLF candidate) but also in the long-run when you’ve got plenty socked away for retirement. If you don’t qualify for PSLF and are looking toward 20-25 year loan forgiveness, you need to balance out the tax implications of the forgiveness benefit versus how much you’ll accrue in matching funds and interest earned over that same period to weigh the cost-benefit.

#3 Be Mindful of Student Loan Interest Paid This may sound like a circular reference, but the more you pay in student loan interest, the lower your AGI will be and the lower your income-sensitive repayment amount will be. Interest becomes a concern if you are not eligible for tax-free student loan forgiveness and here’s why. If you don’t pay off at least the monthly amount of accrued interest, you will be hit by interest capitalization where interest piles on top of interest to accrue even more interest!

But if you service at least the amount of interest due each month (even if this is in excess of the amount IBR/ICR/PAYE determines you must pay) you won’t be facing a huge tax bill if your forgiveness is taxable and the balance has grown. For instance, if your IBR payment is set at $70 and your loan accrues $150 in interest each month, you’ll have $80 left over that then starts to accrue interest as well. This is a balancing act for those not eligible for PSLF. For those planning on PSLF, pay the low payments, include the interest on your AGI determination and enjoy the lowered payments!

Final Thoughts There’s a cost-benefit to every financial decision you make. If you can afford to pay your loans under the 10 year standard plan, you should do that. Even better, you should apply the debt avalanche mindset and try to pay it off even sooner. But if you’re too broke to pay your loans under the decade plan, adopt an income-sensitive plan and then still pile on any extra monies you have and ask that these funds be applied towards accrued monthly interest and then principal for any additional amounts! This will minimize the tax hit if you have to ride an income sensitive plan all the way out to forgiveness in 20-25 years.

What Is Student Loan Consolidation?

A Student Loan Consolidation allows borrowers to combine all of their federal student loans into one new loan with one lender. Sending two, three, or even four separate payments to different lenders and trying to track their loan balances, interest rates, and due dates can be quite cumbersome.  The consolidated student loan will be much easier to manage and keep track of.  There are many other benefits to the federal Student Loan Consolidation program as well.

The Student Loan Consolidation Process...

1. Determining client's current financial situation.

Eligibility for programs designed to lower student debt is determined by the Department of Education, based on key information – client's current income, their family size and their debt amount.  First all necessary information from the client is gathered. At this stage processing client's application for a Student Loan Consolidation is done directly with the Department of Education via their website at: StudentLoans.gov

It will easily be determined which programs clients qualify for and outline which program options best suits client’s needs.

2. Identify which program maximizes client's savings.

Any individual can qualify for any number of programs available through the department of education.  It’s important to choose the right program, based on client's current financial situation and future plans. Client is given in detail each qualifying program’s advantages and disadvantages so that clients can make an informed decision as to which program is best suited for them. 

Clients are then informed of the appropriate steps needed to move forward.

3. Student Loan Consolidation Application process.

If client chooses to hire a private company for their student loan consolidation service they will handle the application process for them from start to finish.  They will determine, gather and fully prepare all documentation needed to qualify client for the program chosen.  After the application is deemed sufficient, it is then submitted by the private company to the Department of Education on client's behalf. 

The entire Student Loan Consolidation process usually will take anywhere from 21 to 60 days to complete.

Note: Client should be advised that all Student Loan borrowers may also choose to complete the application process on their own without the help of a private company as the programs are available directly through the Department of Education.

Understanding Student Loan Repayment Options

Consolidating a client's Federal Student Loans gives them a few different Student Loan Repayment options. This module is designed to explain how the calculations are made, and also to assist clients on when it may be wise to choose one repayment plan over another. Each have their benefits, and client should allowed to make the final decision as to which option they think will benefit them the most in the short and long term.

The repayment plan options are: Standard Repayment, Graduated Repayment, Extended Fixed Repayment, Extended Graduated Repayment, Pay As You Earn, Income Based Repayment (IBR), Income Contingent Repayment (ICR), and finally Income Sensitive Repayment (ISR).

Standard Repayment Plan

In the standard repayment plan, the payment on the client's loan is calculated like any normal loan payment, based upon the size of the loan and also the term of the loan. The term is always based on the size of the loan. Depending on client's income and family size, the standard repayment plan can be a good option if:

They want to pay off the loan as soon as possible and currently have less than 30 years left on the term.

They do not qualify for an income based repayment plan because of a higher income

Their loan amount is small enough where they can be paying a minimal amount over a short period rather than extending it for an additional X amount of years.

The standard repayment plan allows client to take care of their loans in a timely manner if they are making regular and full payments on them. They will pay less interest on a standard repayment plan than they will under the graduated.

Often times customers that do not qualify into either of the Income Based Repayment plans do not see a benefit of consolidating their loans into a Standard Repayment plan when their current payment can be nearly the same. This often is misguided as one of the major benefits of this consolidation is the flexibility with the repayment plans. If they come under hardship in the future, at any moment they can change their repayment plan into an Income Based Repayment plan. What this does for them is allow them to then have a payment based on their income, which may prevent them from falling into default on their loans. In many cases their payment can roll to zero on their loans. This is not a deferment status, which essentially pauses their term. They would have a zero payment for however long their hardship lasts, and the term continues to move forward. This is where the forgiveness aspect plays a large roll. Once the term is over the loan is completely forgiven. This is a huge benefit to the program that is often overlooked by clients until this benefit is explained to them.