Can You Change Your Income-Driven Student Loan Payment When Your Income Changes?

How Your Income-Driven Repayment Plan Is Impacted by an Income Change

A young couple reviews their student loan documents at a cafe.
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An income-driven repayment plan (IDR) can help make paying off your student loans more manageable by tailoring your monthly payments to your income and household size. Income-based repayment (IBR) could be a good fit for you if you're at the beginning of your career and aren't earning a lot yet.

But what happens when your income drops and your payments no longer fit your budget? You may decide to switch jobs or get laid off from work, both of which can directly impact your paychecks. Knowing what to do following a reduction in income could help you steady your monthly budget and weather the financial storm. 

Note

On Aug. 24, 2022, President Joe Biden’s administration proposed a new plan for federal student loan repayment for undergraduate loans. The plan would cap monthly payments at 5% of your monthly income. After 10 years, whatever remaining balance you have would be eliminated if the original loan balance was $12,000 or less.

How To Report a Change in Income

The Department of Education offers an online tool to help guide you through the reporting process when your income changes. Here's how it works: 

  • Visit the Department of Education's income-driven repayment plan website
  • Find the menu option that says "Recalculate my monthly payment" and log in to your account.
  • Choose "I am submitting documentation early to have my income-driven payment recalculated immediately" from the menu on the next page. 
  • Answer the questions regarding marital status, employment, and your number of dependents. 
  • Answer the questions regarding your most recent tax filing, income changes, and whether you have taxable income
  • You'll be directed to provide proof of income directly to your loan servicer if you mark "Yes" to the question about taxable income.
  • You'll receive a pre-filled application you can send to your loan servicer, along with your income documentation, when you complete the rest of the online tool.

You must document all taxable income you're currently receiving, including your spouse's taxable income if you're married. Taxable income includes money you earn from a job, tips, unemployment benefits if you're laid off, alimony, interest, and dividends from any investments you might have. You do not have to include things like child support or social security benefits you receive. 

You must tell your loan servicer where your income comes from and how often you receive it. Pay stubs are usually sufficient, although you can substitute a signed statement explaining where the income comes from if you can't furnish a piece of documentation.

Your loan servicer will review your application for a payment reduction and your income documentation and determine whether your payments can be lowered. 

The date on any form of supporting income documentation you provide must be no more than 90 days from the date you sign your application.

Note

On Tuesday, Nov. 22, 2022, the Biden administration extended the pause on payments and interest on federal student loans for the eighth time. Borrowers with federal student loans won’t have to make payments, and loans won’t resume accumulating interest, until 60 days after court cases challenging Biden’s student loan forgiveness program are resolved or the Department of Education is allowed to move forward with the program. If the cases aren’t resolved by June 30, 2023, payments will resume two months after that.

When You Should Report a Change in Income

The best time to report a change of income to your loan servicer is before you reach a point where you're struggling with how to pay off your student loans. You may want to reach out to find out what options you have as soon as you experience an income drop that looks to be more than just temporary.

Remember that when you're on an income-driven repayment plan, such as income-based repayment or Revised Pay as You Earn, you must recertify your income annually so your loan servicer can ensure that you're still eligible based on your income.

Note

On Aug. 24, 2022, President Joe Biden announced via Twitter the cancellation of $10,000 of federal student loan debt for eligible borrowers, and $20,000 for federal Pell Grant recipients.

Why You Should Report a Change in Income

Reporting a change of income can reduce your loan payments even if you've lost a part-time job or a side gig that you work in addition to your full-time career. Lowering payments through income recertification can help you avoid default if your budget is stretched thin and you're worried about missing payments.

Defaulting can hurt your credit score, and it can also result in other negative consequences, such as wage garnishment and an offset of your tax refund.

Note

You enter default status when you're at least 270 days late on making payments. You aren’t eligible for income-driven repayment plans if you enter default.

Whether it makes sense to change your income-driven repayment plan depends on how long you expect your income to be lower than it was, how much of a financial strain your current payment presents, and what your new student loan payment would end up being. 

Types of IDR Plans

In addition to having your monthly payment recalculated, you may also consider switching to an income-driven plan if you think your income may stay low. A recession could mean that your employer cuts hours or a slowdown in business if you work in a service-based job.

You can make the switch to an income-driven plan from a non-IDR plan (standard, graduated, or extended) or from another IDR plan, provided your loans qualify for IDR repayment.

Note

You'll have to make at least one payment under a standard repayment plan before the switch is completed if you switch from an IBR plan to another IDR plan. The payment will likely be significantly higher because payments are not based on your income. 

You may want to find the plan that's going to offer the lowest possible monthly payment in this scenario. IDR plans include: 

  • Revised Pay as You Earn: Payments are generally 10% of your discretionary income.
  • Pay as You Earn: Payments are generally 10% of your discretionary income, but they're never more than what you'd pay on a standard 10-year repayment plan.
  • Income-Based Repayment: Payments are generally 10% of your discretionary income if you took out your loans on or after July 1, 2014, or 15% for loans taken out before July 1, 2014. But they're never more than the Standard 10-year Repayment Plan amount.
  • Income-Contingent Repayment: Payments are the lesser of 20% of your discretionary income or what you would pay on a repayment plan over 12 years with payments adjusted to your income.

The Department of Education offers a loan simulator to help you estimate your payment amount under each plan. Use the simulator to gauge which plan would work best based on your current income. 

Other Options to Consider 

There are other ways to manage student loans when you can't afford payments. You can take a deferment or put loans in forbearance temporarily if you have federal loans.

You can take a break from making payments toward eligible loans for a set period of time set by your loan servicer with either option. The difference lies in how the interest on subsidized loans is treated. 

You're not responsible for paying the interest that accrues on subsidized loans and federal Perkins loans during a deferment period, but this program ended in 2017. The government paid the interest for you. You'll pay for interest on unsubsidized loans, direct PLUS loans, and loans from the federal family education loan (FFEL) program. although the FFEL program ended in 2010.

But interest will accrue on direct loans and FFEL loans during the time you aren’t making payments with a loan forbearance. You can make interest-only payments during your forbearance, which could be a smart choice because any interest you don’t pay will be added to your principal balance. You may end up with a higher loan balance at the end of your forbearance.

Note

The Department of Education expanded the loan forbearance created by the CARES Act in March 2021. The change applied to defaulted Federal Family Education Loans (FFEL) owned by private parties. Any payments made between March 13, 2020, and Sept. 30, 2021, were eligible for reimbursement. Garnished wages or tax refunds were returned to the borrower, and the loans were restored to good status.

You have a total of three years of forbearance and three years of deferment. You must continue making payments after you've requested a deferment or forbearance for your loans until you receive notification that you've been approved.

What Not to Do

Stopping your payments is the worst thing you can do when you're managing your student loans after a job loss or drop in income. It puts you at risk of default, which can create new problems if you're then in the position of trying to rehabilitate those loans later. The best approach is a proactive one. Communicate regularly with your loan servicer to find a solution when you're struggling to make student loan payments. 

Key Takeaways

  • Recertifying your income-driven repayment plan could reduce your monthly payments if you lose income.
  • Switching to an income-driven plan could reduce your monthly payments significantly if you’re in a standard, graduated, or extended repayment plan.
  • Not making payments for at least nine months will have severe effects on your credit score and could lead to wage garnishment. 
  • Talk with your student loan servicer about which IDR plans you’re eligible for. One phone call could relieve a lot of stress and confusion.


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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
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