Income-Driven Student Loan Repayment (Part 2)

Vital Student Loan Terms - Demystified
student loan 2

In part one, I introduced income-driven repayment plans and their most basic qualification requirements. For any student loan repayment plan to make any sense, though, there are some other terms you need to understand first.

Poverty Guideline Amount:

Regardless of how much money you make, this matter if you want to use income-driven repayment. The amount varies based on your state (well, mainland versus Alaska or Hawaii) and family size and is published annually by the U.S. Department of Health and Human Services right here (https://aspe.hhs.gov/poverty-guidelines). Look this up and make a note of it because you’ll need it to determine your

Discretionary Income:

Discretionary income is supposed to be the money you have after covering your basic needs. Now, that’s the concept, but as is so often the case, it is how the concept is codified and not the concept itself which matters most. All income-driven repayment plans base your payment on your discretionary income.

Your discretionary income is any income which exceeds 150% of your poverty guideline amount. So if you live alone in the contiguous 48 states, then your discretionary income is your annual income which exceeds 150% of $11,880 (so whatever exceeds $17,820 per year). If, for example, you make $45,000 per year, your discretionary income is $45,000 – $17,820 = $27,180. This calculation uses your adjusted gross income (AGI), same as your taxes. So there’s a good chance it won’t exactly match what your paychecks say. Go ahead and write/type/smear your discretionary income somewhere because this is probably the most important number you’ll need to determine your payments under any income-driven plan.

Partial Financial Hardship:

The way this one is written in Department of Education documents is confusing as hell. It matters because you need one to qualify for IBR and PAYE plans (more on those later in the series). Here’s how to determine if you have a partial financial hardship:

  1. Calculate your discretionary income (needed it already!). Then determine what 10% and 15% of that is.
  2. Now compare the total you owed on your loans when they entered repayment to what you owe right now. Whichever one is higher, divide that by 10. That’s your “annual amount due”. You divide by 10 because it’s based on the standard pay-it-off-in-10-years-no-matter-what payment plan.
    1. If you are married and required to provide your spouse’s income documentation, you also get to use their eligible loans in the calculation. This is good, since counting those loans makes you more likely to qualify (and counting their income already made you less likely to qualify).
    2. Only Direct loans qualify for IBR and PAYE. But you can still count your FFEL loans that aren’t in default toward your annual amount due. I shouldn’t have to say it, but your parents’ PLUS and consolidation loans DO NOT count. They’re not you.
  3. If your annual amount due is higher than 10% of your discretionary income, you qualify for PAYE and IBR if you’re a “new borrower”. Yes, they’ve redefined the word “new” in student loan world, and yes, I’ll show you how to determine if you’re “new” in the next segment. If that amount is higher than even 15% of your discretionary income, you qualify for those AND you qualify for IBR even if you’re not a “new borrower”.
  • That’s not super complicated, but it’s still sorta wonky. Here’s an example: You’re single and live in Ohio and make $45,000 per year so we know your discretionary income is $27,180. 10% of that is $2,7180, 15% is $4,077. You owe $50,000 in student loans right now, but owed $55,000 when you entered repayment. Take $55,000 / 10 = $5,500 annual amount due. Based on this, you meet at least this qualification for PAYE and IBR for newbies and oldies.
Interest Capitalization:

If Satan invented any equation, this one might be it. The worst. This adds any “outstanding” (unpaid) interest to your principal (the amount you actually took out before interest). From then on, your interest will be calculated on the new, higher principal. So you’re literally paying interest on interest, like in mob movies.

Here’s an example: You owe $50,000 of principal at a 6.8% interest rate. Interest accrues for a year and you don’t pay anything on anything (for some reason). So now you owe $50,000 plus $3,400 in outstanding interest. Your interest capitalizes, so now you have $53,400 principal and $0 outstanding interest. But over the next year, you accrue $3,631.20 in interest. So your interest rate stayed the same but you accrued an extra $231.20. If the trend were to go on for a while, it gets nasty fast. And since it’s now principal, you don’t even get to write it off on your taxes as a student loan interest deduction!

Deferment:

This is a period of time when you don’t have to make any payments on your loans. The most obvious deferment is while you’re a full-time student. Being a student is obviously not very good for your short-term income, and someone realized asking you to pay on your student loans while you’re still a student is remarkably stupid. So you get a deferment while you’re in school. There are also other situations for deferment, such as the six months after you graduate. While in deferment, any subsidized loans you have do not accumulate interest. Unsubsidized loans always accumulate interest, even when you’re a freshman (surprise!). While we’re at it, that’s almost the entire difference between subsidized and unsubsidized loans.

Forbearance:

Deferment’s (functional) alcoholic cousin. Forbearance is usually granted when you should be making payments but can’t for some reason. It might allow you to make smaller payments or none at all. Interest accumulates on all of your loans during forbearance. Some of you young folks may not know, but for those of us who were graduates in the dark days before 2010, forbearance was the only option available if you couldn’t afford the full standard payment on your loans. It is temporary, and God help you if it ends and you still can’t afford to pay.

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  • Income-Driven Student Loan Repayment (Part 3)Income-Driven Student Loan Repayment (Part 3) – Entry Revel
    27 January 2017 at 12:07 am

    […] all that preparation in Part 1 and Part 2, it is finally time to discuss the repayment plans themselves. If you need to refer back to the […]

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