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The phrase “income-based repayment” sounds descriptive enough — payment amounts are based on your income. But many factors may affect how servicers calculate payments under Income-Based Repayment and the other three income-driven repayment plans including:
The income-driven repayment plan you use.
Your family size and location.
Your tax status with your spouse.
Your spouse’s federal student loan debt.
Here’s how income-based repayment is calculated, plus tips for what to do if those payments are too high.
The income-driven plan you use
There are four income-driven plans, and each generally calculates payments as a percentage of your discretionary income:
10% of your discretionary income.
10% of your discretionary income.
10% of discretionary income if you borrowed on or after July 1, 2014; 15% of discretionary income if you owed loans as of July 1, 2014.
20% of discretionary income or fixed payments over a 12-year term — whichever is less.
Other repayment plans may offer lower payments
That 10% cap isn’t necessarily the same for every plan. For example, payments under REPAYE will always be 10% of your income, no matter how much you earn. On the other hand, PAYE limits payments so they’re never more than what you’d pay under the standard repayment plan — even if that’s less than 10% of your discretionary income.
The federal government also offers extended repayment and graduated repayment plans that can lower payments not based on your income. Income-driven plans have features these plans lack, like loan forgiveness, but consider changing repayment plans if your calculated payment grows too big.
Your family size and location
To determine your discretionary income, the Education Department finds the federal poverty guideline for your location and family size. Location won’t affect your payments unless you live in Alaska or Hawaii, but the larger your family, the less you’ll pay under an income-driven plan.
For example, let’s say your adjusted gross income (AGI) is $40,000, you live in New York and you’re single. Under PAYE, you’d owe $177 a month. If you got married — increasing your family size to two — your payments drop to $122. Had a child? With a family size of three, payments shrink to $67.
Updating info early can reduce payments
Since you last recertified your income-driven plan, see if you’ve had any life changes — like having a baby. Other examples could be taking a lower-paying job or losing your job altogether. In these instances, you can submit updated information at studentloans.gov or to your servicer and ask for an immediate payment adjustment.
Your tax status with your spouse
If you’re married and on an income-driven plan, monthly payments depend on your tax-filing status.
If you file taxes jointly, your payments almost always factor in your spouse’s income. Alternatively, most income-driven plans base payments solely on your income if you’re married but file taxes separately. REPAYE is the exception — it always uses your spouse’s income unless you’re separated or can’t reasonably access this information.
Your spouse’s income could have a big impact on your monthly payments. For example, let’s say you owe $30,000, your AGI is $40,000 and your spouse’s AGI is $100,000.
If you filed taxes separately: You would demonstrate the partial financial hardship needed to qualify for PAYE, and your payment would be $122 based on your individual income and a family size of two.
If you filed taxes jointly: Including your spouse’s $100,000 AGI eliminates your hardship, so you’d no longer qualify for PAYE. If you went with REPAYE instead, you’d owe $955 a month — more than seven times that $122 payment.
Examine tax filing options to pay less
Married borrowers shouldn’t choose a tax filing status based solely on their student loans, but filing separately may be an option for decreasing your payments. Talk to a tax professional to determine whether it makes sense for you to file jointly or separately based on your entire tax picture.
Your spouse’s federal student debt
If you file taxes jointly or use REPAYE, another factor can decrease your monthly payment: your spouse’s federal student loans. Private student loans never factor into income-driven calculations.
Let’s look at our example again where your payment is $955. But now, let’s say your spouse owes $50,000 in federal student loans. Here are the steps your servicer would take to determine your payment amount.
Calculate your combined federal student loan debt. Your $30,000 plus your spouse’s $50,000 is $80,000.
Find the percentage of the debt you owe. $30,000 divided by $80,000 is 0.375, meaning you owe 37.5% of the debt.
Multiply the joint payment amount by that percentage. Your new bill would be 37.5% of $955, or roughly $358.
You and your spouse can make repayment plan decisions independent of each other. If you opted for that $358 payment, for instance, your spouse is not required to pay the remaining $597. He or she could stick with standard repayment or select a different option.