Lancaster Student Loan Repayment Lawyers
Income Contingent Repayment
The nation is struggling with student loan debt, with nearly 1 in 3 Americans carrying some sort of educational debt. Unfortunately, the bankruptcy code does not make it easy to discharge this type of unsecured debt. Instead, those with federal loans can choose a repayment option which can reduce their monthly payment below what it would be with a standard repayment plan. Our Lancaster student loans repayment lawyer takes a more in-depth look at who qualifies and how this repayment option works.
Do You Qualify for Income Contingent Repayment?
Income-contingent repayment is the oldest income-driven repayment plan. As the name suggests, borrowers will pay back an amount based on their monthly income, in particular, their discretionary income.
You can calculate your discretionary income by subtracting 100% of the federal poverty level from your adjusted gross income, represented on your most recent federal tax form. You then pay 20% of this amount or pay a fixed amount on a 12-year repayment plan.
For example, your adjusted gross income could be $40,000. In 2023, the current federal poverty level for California is $14,580 for a single person and $19,720 for a two-person household. Based on the calculation, a single person would have $25,420 in discretionary income. Twenty percent of this is roughly $5,084 a year, or $424 a month.
If you stick to your repayment plan for 25 years, then any remaining debt is forgiven. Some borrowers, however, might need to pay income tax on the forgiven amount.
Income-contingent repayment is not the best option for most borrowers. Newer income-driven repayment (IDR) plans offer more favorable terms, and you should fully consider all your options before signing up. For example, Pay As You Earn Repayment only uses 10% of your discretionary income, and your remaining debt is forgiven after 20 years. This plan also uses a more generous calculation to come up with your discretionary income, which ends up reducing your monthly bill.
The main reason borrowers use income-contingent repayment is that their loans don’t qualify for other IDR plans. Those using income-contingent repayment have:
- Direct subsidized loans
- Direct unsubsidized loans
- Direct PLUS loans for professional or graduate students
- Direct consolidation loans
Although Parent PLUS loans are not immediately eligible for ICR, parents can consolidate them with a direct consolidation loan. In fact, this is the only IDR option for those holding Parent Plus loans. If you have other loans, you should definitely consider other income-driven repayment plans, like Income-Based Repayment or Pay As You Earn.
Income-based repayment is one of the most popular income-driven repayment plans offered by the federal government. These plans allow student loan borrowers to lower their monthly payment and make ends meet. If you have student loan debt, the odds of discharging it in bankruptcy are low. Still, the right income-based plan can free up income and reduce stress.
To see if you qualify, read on or contact Wadhwani & Shanfeld. Our Lancaster student loan repayment lawyer can help you settle on a strategy for dealing with student debt.
Income-Based Repayment: The Basics
Recent borrowers are automatically enrolled in a ten-year standard repayment plan, which will result in monthly payments of equal size for 120 months. With Income-Based Repayment (IBR), you can lower that amount based on your discretionary income.
The amount you pay will depend on when you took out the loans.
If you took them out on or after July 1, 2014, you are considered a “new borrower.” You will pay 10% of your discretionary income, which is adjusted gross income minus 150% of your state’s poverty level. The amount you pay can never be larger than what you’d pay in a 10-year repayment plan. After 20 years, any remaining balance is forgiven.
If you took loans out before July 1, 2014, you are not considered a new borrower. You will pay 15% of your discretionary income. Likewise, it will never be higher than what you’d pay under a 10-year standard plan. After 25 years of payments, the government will forgive the remaining balance.
What is discretionary income? First, find your adjusted gross income from your most recent tax return. The poverty level for California depends on the size of your household. In 2023, it is:
- 1 person household: $14,580
- 2 person household: $19,720
- 3 person household: $24,860
Take 150% of the poverty level and deduct it from your adjusted gross income. Then multiply this amount by 10% or 15%, depending on whether you qualify as a new borrower. For a person living in a three-person household with $60,000 in income, they would have $22,704 in discretionary income. Ten percent would be $2,270, or around $190 per month.
Most federal loans qualify for IBR except for loans to parents:
- Parent PLUS Loans
- Direct Consolidation Loans that repaid any PLUS loans to parents
- FFEL PLUS loans to parents
- FFEL consolidation loans to parents
If you have a PLUS parent loan, then your sole option is income-contingent repayment after you consolidate with a direct consolidation loan. That’s not a great option, and other borrowers should take a close look at IBR and Pay As You Earn before enrolling in an income-contingent repayment plan.
Pay As You Earn Repayment
If you’re struggling with monthly student loan payments, help is available. The government offers several income-driven repayment plans for federal student loans which can lower your monthly payment and allow you to avoid default. Wadhwani & Shanfeld helps consumers deal with debt, including federal student loans. Although it’s hard to get these loans discharged in bankruptcy, you do have options for limiting their financial impact, including the Pay As You Earn program, called PAYE. Contact our law firm to talk with our Lancaster student loans repayment attorney about your financial situation.
How Does PAYE Work?
Like other income-driven repayment plans, PAYE will base your monthly payment on your discretionary income. The goal is to get a monthly payment that fits with your budget.
To determine your discretionary income, you take 150% of the federal poverty level for California, and then subtract this amount from your adjusted gross income (AGI). You can find your AGI on your federal tax return.
For example, the poverty level in 2023 for California is $14,580 for a single person and $19,720 for a two-person household. If your adjusted gross income is $35,000, then a single person would have roughly $13,130 in discretionary income after you deduct 150% of the poverty level.
Under PAYE, you will pay 10% of that discretionary income each year. Divide it by 12 to get your monthly amount. Under our example above, you would pay $1,313 per year, or roughly $109 a month. You will pay this amount so long as it is lower than what you would pay under a standard repayment plan.
There are other features that help borrowers. If you stick to your repayment plan for 20 years, the government forgives the unpaid remainder of your debt. These terms are favorable compared to other IDR plans, like income-contingent repayment.
Are You Eligible?
Like other income-driven repayment plans, PAYE only applies to federal loans. However, you can use them with:
- Direct subsidized loans
- Direct unsubsidized loans
- Direct PLUS loans for professional or graduate school
- Public Service Loan
You can also use PAYE for other federal loans if consolidated, including:
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- Federal Perkins Loans
- FFEL PLUS loans to professional or graduate students
- FFEL Consolidation Loans that didn’t repay PLUS Loans to parents
- Direct Consolidation Loans that didn’t repay PLUS Loans to parents
You also must have borrowed your first federal student loan after October 1, 2007. So older borrowers can’t use PAYE. If you have a Direct or Direct Consolidation loan, then you must have taken it out after October 1, 2011 to qualify for PAYE.
Contact Us with Questions
Student loans create enormous financial stress, but proper planning can reduce the amount you pay each month. At Wadhwani & Shanfeld, we can also discuss tackling other debts, like credit cards or personal loans. Those types of unsecured debts are eligible for discharge in bankruptcy, which could ease the financial stress you feel. For advice from a Board-Certified Bankruptcy Specialist, please contact our firm today. One of our Lancaster student loans—income-contingent repayment lawyers will help you develop a plan to manage your debt.