Student Loan Repayment Plans

August 3, 2019

On our blog, we’ve dedicated a few articles to covering different aspects of student loan debt. As we’ve discussed, this debt is quite substantial. In fact, it now surpasses most other kinds of consumer debts. Student loan debt is also very difficult to step away from. In 2005, Congress amended the law so that student loan debt can’t be discharged in bankruptcy, except in rare circumstances. In most cases, debtors are stuck with student loan repayment for the long haul.

Student loan debt is also starting to impact our society in significant ways. Millennials, the generation most affected by student loans, are having difficulties reaching certain life milestones. As a direct result of their student loan debt, they’re putting off major life acquisitions. Home ownership, auto ownership, good credit, all of these and other important life markers, are proving elusive for them.  

In order to assist debtors with repayment, the Department of Education created student loan repayment plans which reflect a person’s current level of income. These repayment plans have certain requirements in order to qualify, which we will discuss. If you have student loans, you may want to give one of these repayment options some consideration. Repaying according to one of these plans may be a good way to balance your other financial commitments, including your tax burden. In this post, we will go over the specifics of the income-based student loan repayment plan.  

IBR is Only One Form of Repayment

As mentioned, income-based repayment is one of multiple income adjusted student loan repayment options created by the Department of Education. Right now, there are actually four different options to select from. Debtors can choose between Pay As You Earn, Revised Pay As You Earn, Income-Based Repayment, and Income-Contingent Repayment. Each of these repayment plans has its own entry requirements and may be desirable in a given situation. Income-based repayment, commonly abbreviated as IBR, is typically a good idea whenever someone’s debt payments exceed his or her budget. There are other advantages as well, which we will also discuss.  

Whether you select IBR or one of the other income adjusted repayment systems, you should be aware that you will need to fill out lots of paperwork just to enroll. You’ll need to provide copious documentation in order to fully substantiate your income. You’ll need to do this on a recurring annual basis. Your income can change from year to year, and your repayment plan will adjust if you see a drop or jump in your earnings. 

Basic Qualifications of Income-Based Repayment 

To enroll in the IBR, student debtors have to provide certain information to the DOE. The IBR is also available only to those debtors who have federal student loans. In other words, the IBR is not available for private student loans. This is an important – and disappointing, for many – piece of information. 

Documentation Required

You will need to provide your most recent tax return to the DOE. In addition, you will need to provide other documentation to substantiate your income. You will need to include a copy of your most recent pay stub or paycheck. If you have direct deposit, you will likely need to contact your bank to receive a physical copy of payment. The IBR also has a form which will need to be filled out, signed and then submitted. As mentioned, IBR works on an annual cycle, so you’ll need to finish all of these requirements before the annual deadline. That deadline varies from year to year, but is typically toward the end of March or in the beginning of April.  

Along with more affordable payments, IBR also allows debtors to receive debt forgiveness after a certain period of time. When you enroll in IBR, you are not just enrolling for a single year, rather you’re committing to pay the loan over the full term of IBR. The full term of IBR is usually 20 to 25 years. If you repay your debt over the course of this term, then whatever balance remains after the end of it is forgiven. This can translate into forgiveness of very substantial amounts of debt.  

Potential Drawbacks of the Income-Based Repayment System 

Although the IBR is undoubtedly helpful for certain student loan repayment situations, there can be drawbacks. For one, some debtors who enroll in IBR will end up paying more interest than they normally would. This is because the IBR plan will extend the length of repayment in certain cases. If a given debt is paid over a longer period, more interest will accumulate. This is true despite the fact that IBR adjusts a given debtor’s monthly payment amount.

Potential Adverse Tax Consequences

The other, and perhaps more serious, potential drawback is the tax consequences which can follow from loan forgiveness. If a debtor in an IBR reaches the end of the repayment term, the remaining balance is written off. It’s important to recognize, however, that this forgiveness translates into taxable income for the debtor. This is standard tax treatment for cancellation of debt and often creates a significant tax liability for debtors.

Imagine if someone is forgiven $60,000 of student loan debt. That forgiveness translates into a substantial tax liability an, as we know all too well, the consequences for nonpayment of taxes can be severe. 

Call Us For Assistance!

Whether a given student debtor opts for IBR always depends on the specifics of a given situation. There may be cases where it’s optimal to simply pay according to the traditional payment schedule. IBR typically works best for debtors with high debt but low income. But not every debtor falls into that category.

At Mackay, Caswell & Callahan, P.C., we’re quite familiar with student debtor issues. We regularly consult with clients who have both student debt and also back tax debt. So if you need assistance with a debt related matter, contact one of our top New York City tax attorneys for help. 

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