Borrowers may be surprised by the income-driven repayment plan options available when repayment restarts.
The Department of Education’s approach seems fair, logical, and straightforward.
Granted, calling your loan servicer may still be a nightmare, but many borrowers won’t need help from their servicer as repayment begins.
Determining Monthly Payments for Income-Driven Borrowers
Most borrowers on IDR plans like IBR, PAYE and REPAYE know that their annual certification is only good for one year.
In a pleasant surprise, the Department of Education is not requiring every borrower to recertify before repayment restarts. Instead, borrowers have the option of resuming where they left off.
For example, suppose you last certified your employment in August of 2019. The freeze started in March of 2020. At that point, your certification was about seven months old. When repayment resumes, your old certification is still valid for the next five months.
Finally, loan servicers are responsible for notifying borrowers when they are approaching an IDR certification deadline.
The Payment Pause and IDR Certification: When the government paused payments and interest on federal student loans, they also paused deadlines to certify income.
Lowering Monthly Payments Before the Restart
Borrowers have the option of sticking with their old monthly payments. However, there are opportunities to restart repayment with lower monthly bills.
The standard method for calculating IDR payments is to use your most recent tax return. Because the payment and interest pause dates back to March 2020, most IDR payments are currently based upon 2018 or 2019 federal tax returns when repayment resumes.
If your income has dropped since your last certification, you have the option of recalculating payments before your next deadline. Based upon where we are on the calendar, this gives borrowers a wide range of options.
Use your 2020 Federal Tax Return – Many people faced a reduction in income due to the pandemic and 2020 may have been a low year. The lower income means a smaller monthly bill.
Use your 2021 Federal Tax Return – Because we are still in 2021, this option isn’t available yet. However, if 2021 marks the low point in your income, filing taxes quickly and then certifying as soon as possible may be the best route.
Use a recent paystub – If both the 2020 and 2021 tax returns show more income than what you currently earn, you can use a recent paystub as an alternative documentation of income.
Unemployed Option – If you don’t currently have any taxable income, you can submit a recertification and qualify for $0 per month payments for the next year.
IDR Certification Strategy
As you get ready for the restart, I have a couple of tips for borrowers to use.
First, use the certification method that results in the lowest monthly payment. Figuring out how to get the lowest payment isn’t always easy. Fortunately, the Department of Education’s Loan Simulator does an excellent job of helping borrowers estimate monthly payments on the various repayment plans.
Second, if 2021 was the low income year for you, take advantage of the tax filing deadlines and timing for the repayment restart. If you file your 2021 tax return in January, you can immediately request your payment recalculated. If your 2022 income comes in higher, delay fling that tax return until closer to April of the following year. Because the annual certification is based upon your most recent tax return, it is possible to qualify for lower payments for two years based upon one down year of income.
The Repayment Restart and Student Loan Forgiveness
Even though the government suspended interest and paused payments, the forgiveness clock kept ticking.
Borrowers working towards Public Service Loan Forgiveness can still earn credit for the months they worked at an eligible employer during the Covid-19 payment freeze.
Additionally, the borrowers working towards the 20 or 25 year IDR forgiveness will also receive credit for the nearly two years that payments were suspended.
Automated Payments and the Repayment Restart
Many borrowers have their loan servicer auto-debit their monthly payments.
If you don’t want auto-debits to resume, the best approach is to log in to your loan servicer account to terminate any auto-debits.
According to the Department of Education, loan servicers will use the following rules for the restart:
- If you signed up for auto-debit before March 13, 2020: Your loan servicer should contact you to see if you want to continue with auto-debits. The loan servicer should end the auto-debt if you don’t respond.
- If you signed up for auto-debit after March 13, 2020: Automated payments will resume automatically.
The auto-debit rules are a bit more complicated for borrowers with Perkins loans and borrowers with loans in default.
Additional Covid-19 Relief for Student Loan Borrowers
Unfortunately, once the payment and interest pause officially ends on January 31st, 2022, the Covid-19 related assistance is over for student loan borrowers.
The To-Do List for the Repayment Restart
- Update contact information with your loan servicer. Some of the servicers are changing and you don’t want to miss any important notificiations.
- Select the best repayment plan for your situation. The best resource for this task is the Department of Education’s Loan Simulator.
- Update your progress towrds PSLF. Any borrower considering PSLF should use the PSLF help tool to file the necessary forms to document their progress. (Also check out the limited waiver if you have previous eligiblity issues.)
- Double-check auto-debits and bill pay. If you want payments made automatically make sure they are set up for the right amount.
- Call your servicer with questions as soon as possible. The longer you wait to call, the longer the lines will be. The late Januaray and early February hold times will be awful.