How Will Income-Driven Repayment Work After Federal Student Loan Forbearance Ends?
By definition, the amount you pay on income-driven student loan repayment (IDR) plans changes along with your financial situation. That’s why many borrowers are wondering what will happen with their IDR plans once the current Covid-19 federal forbearance period ends.
With so many borrowers in a different position financially than they were before the pandemic, there are questions as to how things will work once normal payments resume as early as this fall. We’re here to walk you through what will change, and what options you need to consider as the federal forbearance period winds down.
What is Income-Driven Repayment?
Income-driven repayment (IDR) plans are available for borrowers with federal student loans. These plans use your income, location and family size to determine your monthly payment. If you’re married, your spouse’s income may be included in the calculation. This depends on whether or not you file taxes jointly and if the particular IDR plan includes spousal income.
There are five IDR plans:
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
- Income-Sensitive Repayment (ISR)
The terms for most IDR plans are either 20 or 25 years. After the term has been completed, any remaining balance will be forgiven. In the past, borrowers had to declare the forgiven amount as income on their taxes. But the Covid-19 stimulus package President Joe Biden signed into law on March 11 stipulates that borrowers who receive student loan forgiveness from Jan. 1, 2021, through Dec. 31, 2025 won’t have to pay income tax on the forgiven balance.
IDR plans are available to both employed and unemployed borrowers. If you have no current income, your payment would be $0. These payments would still count toward loan forgiveness.
Borrowers on an IDR plan have to recertify their information once a year, which may result in a lower or higher monthly payment. But if your financial or personal situation changes, like if you lost your job or had a baby, you can resubmit your information before the annual certification date. There is no limit to how many times you can resubmit in a given year.
How Administrative Forbearance Changes Income-Driven Repayment
When the government established administrative forbearance in March 2020 due to the Covid-19 pandemic, it automatically suspended all federal student loan payments and reset interest rates to 0%. Administrative forbearance also postponed the date on which IDR participants must recertify their income.
Here’s how that looks for the average borrower. Let’s say you’re on an IDR plan, and you were supposed to recertify your income in April 2020. Because of administrative forbearance, that is now pushed back until after the forbearance period is over.
Borrowers should also be happy to know that the months under administrative forbearance still count toward IDR loan forgiveness. Many borrowers on an IDR plan are working toward Public Service Loan Forgiveness (PSLF), which requires 120 months of payments while working full-time for a qualifying nonprofit or government agency.
If you are still working in a PSLF-eligible position, the months on administrative forbearance will count toward the 120-payment requirement for loan forgiveness. However, if you lost your job during the forbearance period, those months of unemployment will not count toward PSLF.
What You Can Do After Federal Forbearance Ends
When the administrative forbearance period ends, you’ll have to decide what to do with your student loans. Here are your available options:
Option 1: Stay on the Same Repayment Plan
The first alternative is to just let payments resume. Automatic debit will resume when the forbearance period ends. This option works best for borrowers who got a raise during forbearance and will owe higher payments once their recertification is due.
Let’s say that before forbearance, you were making $40,000 a year and were on an IDR plan with $100 monthly payments. If your income increased to $50,000, then your monthly IDR payments would also increase when you resubmit your information.
If you still have six months left under your current IDR plan, you can keep making $100 payments until you’re required to recertify. Call your loan servicer and ask when your new certification date is.
Option 2: Resubmit Your Income
If you lost your job or were furloughed during the forbearance period, you can apply for a new IDR monthly payment. You’ll have to provide evidence that you were laid off, like a termination letter from your previous employer or proof of unemployment benefits. Ask the loan servicer what documents will qualify.
You may also resubmit your information if you’ve had a child since the administrative forbearance period began. Adding a dependent will also reduce your monthly payment. If you have children and got divorced during forbearance, you may also qualify for a lower payment.
Option 3: Switch to Another Payment Plan
IDR plans aren’t the only option available if you want to reduce your monthly payments. The federal government also offers extended and graduated repayment plans.
The extended plan stretches payments to 25 years, while terms under the graduated plan are either 10 or 30 years, depending on the type of loan you have. Neither the extended nor the graduated plan offers loan forgiveness—a notable downside compared to an IDR plan. If you want a low payment, IDR is often the best choice. But a different IDR plan could be better for you now than before the forbearance period began, depending on your circumstances.
Use the government’s loan simulator to see which repayment plan would result in the lowest monthly payment for you.
Option 4: Apply for Deferment or Forbearance
If you have a job but can’t afford the monthly payments on IDR because of other bills or a temporary emergency, pausing your student loans will provide relief. The federal government has two programs: deferment and forbearance.
The most crucial difference between the two only applies to borrowers with subsidized loans. If you have subsidized loans, your loans won’t accrue interest under deferment, but they will accrue interest under forbearance.
However, qualifying for deferment may be harder than forbearance. For example, to be eligible for the economic hardship deferment, you must earn 150% or less of the federal poverty guidelines for your state and family size.
Contact your loan servicer and ask if you’re eligible for deferment. If not, ask what you need to apply for forbearance. Because you have to be approved manually, you should continue making payments as usual until the request has been granted.
Option 5: Refinance Federal Loans
While interest rates on federal loans are relatively low, many private lenders are offering even better rates for borrowers who refinance. This can result in huge cost savings.
Let’s say you owe $30,000 in federal student loans with a 6% interest rate and a 10-year term. You receive an offer to refinance to a 4% interest rate with a 10-year term, which will save you $3,518 in total interest over the life of the loan. You could also refinance to a 15-year term and pay $111 less each month. In this case, you would only save $23 in total interest because you extended the repayment term.
Refinancing federal loans is risky because you waive all protections and benefits, including access to IDR. Private lenders also have more stringent forbearance periods. Keep in mind, too, that if President Biden does offer loan forgiveness, it will likely only be available to those with federal student loans.
Option 6: Refinance Private Loans
If you have private student loans as well as federal loans, you can refinance the private loans only. That could get you a lower interest rate on the private loans and let you maintain your federal loan benefits.
Refinancing can potentially lead to a longer term if you want a lower monthly payment. While this can free up cash flow to put toward your other loans or bills, you’ll save the most in interest if you refinance to a shorter loan term—or if you pay extra toward your loans during months when that’s possible.