How to Calculate Income for Income-Driven Repayment Plans

Loans During the COVID-19 Pandemic

Most borrowers with student loans in the United States, including those enrolled in income-driven repayment plans, do not have to make loan payments during the coronavirus crisis.

The Secretary of Education temporarily suspended payments on federal student loans and interest from March 13, 2020, until January 31, 2022. This date was extended to August 31, 2022, then further extended to December 31, 2022, and then again to 2023.

On Tuesday, November 22, 2022, the Biden administration extended the pause on payments and interest for federal student loans for the eighth time. Borrowers with federal student loans will not need to make payments, and interest will not continue to accrue, until 60 days after resolving litigation challenging Biden’s student loan forgiveness program or until the Department of Education is allowed to move forward with the program. If the issues are not resolved by June 30, 2023, payments will resume two months after that.

The period during which loan payments are paused will count toward earning forgiveness under income-driven plans and under the Public Service Loan Forgiveness program.

What is an Income-Driven Repayment Plan?

Income-driven repayment plans aim to make student loan repayment manageable based on your income and family size. There are four different income-driven repayment options you can choose from if you have eligible federal student loans:

• Revised Pay as You Earn (REPAYE): Payments are typically set at 10% of discretionary income. Any remaining balance from undergraduate study will be forgiven after 20 years. The limit is 25 years if any graduate or professional loans are taken out.
• Pay as You Earn (PAYE): Payments are typically set at 10% of discretionary income but cannot exceed the amount you would owe under the standard repayment plan. Any remaining balance will be forgiven after 20 years of payments.
• Income-Based Repayment (IBR): Payments are typically set at 10% of discretionary income if you borrowed for the first time after July 1, 2014, or 15% of income if you borrowed before that date. Payments cannot exceed the amount you would owe under the 10-year standard repayment plan. Any remaining balance will be forgiven after 20 years for borrowers who borrowed their loans after July 1, 2014, or after 25 years for other borrowers.
• Income-Contingent Repayment (ICR): Payments are set at the lesser of 20% of discretionary income or the amount you would owe under a 12-year fixed repayment plan, adjusted for income. Any remaining balance will be forgiven after 25 years of payments.

Note: Student debt that is forgiven or canceled between 2021 and 2025 is not taxable under the American Rescue Plan Act of 2021.

How to Calculate Income for Income-Driven Repayment Plans?

There are a few simple steps to calculate your income for an income-driven repayment plan:

1. Determine your annual income: This includes income from all sources throughout the year, including taxable income from employment, unemployment benefits, earnings, child support, and interest. It does not include non-taxable income, such as public assistance benefits or supplemental income.
2. Determine if your spouse’s income counts: Both your income and your spouse’s income are counted when determining income if you are married and filing jointly. Typically, only your income is counted if you are married and filing separately. Your spouse’s income must be counted under the REPAYE plan unless you are unable to access their income information for some reason or if you are separated.
3. Determine
   Family size: Your family size is the number of people in your family, including anyone living with you who receives more than half their support from you, including children and adults dependent on you.
4. Determine the minimum poverty guidelines for your family size and location: The Department of Education uses the poverty guidelines from the Department of Health and Human Services to calculate discretionary income. Here are some guidelines for 2022:
   • Number of people in the household: 48 contiguous states and Washington, D.C. Alaska Hawaii
   • One person: $13,590 $16,990 $15,630
   • Two people: $18,310 $22,890 $21,060
   • Three people: $23,030 $28,790 $26,490
   • Four people: $27,750 $34,690 $31,920
   • Five people: $32,470 $40,590 $37,350
   • Six people: $37,190 $46,490 $42,780
   • Seven people: $41,910 $52,390 $48,210
   • Eight people: $46,630 $58,290 $53,640
   • For each additional person over eight, add this amount: $4,720 $5,900 $5,430
5. Calculate discretionary income: Calculate your discretionary income by subtracting 150% of the poverty guideline for your family size and location from your annual income if you are on a PAYE plan, an IBR plan, or if your loans are in the qualifying period.
   Your discretionary income is calculated by subtracting 100% of the poverty guideline if you are on an ICR plan.
   Your payments will be equal to 10% or 15% of your discretionary income, depending on your income-driven repayment plan.

Note: The easiest way to calculate your monthly payment under an income-driven repayment plan and other student loan repayment plans is to use the loan simulator available from the Federal Student Aid.

Factors Married Couples Should Consider

The Department of Education will determine eligibility for income-driven repayment plans based on combined income if you file a joint tax return with your spouse. It will also consider combined student loan debt. Marriage and filing a joint tax return may significantly affect your monthly student loan payment.

Filing taxes separately may help keep student loan payments low in some cases, but this tax situation has other consequences. It may make sense to speak with a tax professional about which option is best for you.

Sources:

• Department of Education. “Biden-Harris Administration Announces Final Student Loan Pause Extension Through December 31 and Targeted Debt Cancellation To Smooth Transition to Repayment.”
• Federal Student Aid. “Fiscal Year 2021 Annual Report,” Pages 81, 171, 186.
• Federal Student Aid. “COVID-19 Loan Payment Pause and 0% Interest.”
• Department of Education. “Biden-Harris Administration Continues Fight for Student Debt Relief for Millions of Borrowers, Extends Student Loan Repayment Pause.”
• Federal Student Aid. “COVID-19 Relief: Income-Driven Repayment Plans.”
• Federal Student Aid. “COVID-19 Relief: Public Service Loan Forgiveness.”
• Federal Student Aid. “Income-Driven Repayment Plans.”
• Congress.gov. “American Rescue Plan Act of 2021,” Pages 182-183.
• Twitter. “@POTUS, Aug. 24, 2022 at 11:32 a.m.”
• Federal Student Aid. “4 Things To Know About Marriage and Student Loan Debt.”
• Federal Student Aid. “Income-Driven Repayment (IDR) Plan Request,” Page 5.
• U.S. Department of Health and Human Services. “Poverty Guidelines.”
• Federal Student Aid. “Discretionary Income.”
• Federal Student Aid. “Income-Driven Repayment Plans.”

Source: https://www.thebalancemoney.com/calculating-income-for-income-driven-repayment-plans-5101097