Episode Transcript
Brenton: [00:00:00] In recent weeks, the department of education has made changes to one of his foundational repayment programs for federal student loan borrowers.
But to benefit from these changes, thousands of borrowers could have to decline the opportunity to participate in another highly popular income driven repayment plan.
In this episode, we give you foundational knowledge on how income driven repayment plans work so that when the decision-making time arrives, you'll have everything you need to know. Let's get started.
Hello, this is Brenton Harrison of escape, student loan debt, and your host for the escape student loan debt podcast. If you've been with us since we launched the escape student loan debt podcast, we kind of jumped right in the deep end, as it pertains to giving you details on programs like public service loan forgiveness, and then com driven repayment plans.
And the reason we had to jump right in is because they were impending deadlines for things like the limited public service loan, forgiveness waiver that made it crucial that we gave you just enough information to take action and be included [00:01:00] in that number without going into details that might delay the process.
But now we have a little bit of bandwidth or a wiggle room because there are some approaching student loan deadlines. Namely May 1st, June 30th of July 1st. We're important developments will occur, but right now as January, so we have at least a month or two. To go back to the foundational elements of some of these items so that you have the structure in place to not just take action based on what I said, but take action based on what you understand.
In recent weeks, the department of education may landmark changes and updates to one of its flagship student loan programs. And alternatively, they said that in order to benefit from these changes, You had to make a decision on whether to leave one of the really popular income driven repayment plans for good. If you're participating now and you decide to take advantage of the newly updated plan,
you are foregoing the opportunity to participate in one of their other income [00:02:00] driven repayment plans. And I'm intentionally not giving you the specific names of these plans,
Because that's not what this episode is about. Instead, we're going to go through the foundational elements of income driven repayment plans. So that by the time you have to make those decisions, you not only know more specifics about how these plans are structured, but you have the information needed to determine whether you should stay where you are or whether you should forgo that current plan to take advantage of the newly updated plan that will be available to you.
As a federal borrower.
As a recap, there are really two silos as it pertains to federal student loan repayment programs. There's the silo of the, for lack of a better phrase, pay it off plans where the payment that you make is designed to pay your loan balance in full, in a given period of time, an example would be a standard plan or an extended plan.
And then there are also income driven repayment plans and a second silo. And the core characteristics of this second silo is [00:03:00] that instead of paying an amount needed to pay your loans off in full, you pay a percentage of a number called your discretionary income each year. It does not matter if that's enough to pay off the debt within a given period
after either 20 or 25 years, any remaining loan balances will be forgiven.
These are the common characteristics of these IDR plans. But once you get deeper into that silo, that percentage of that discretionary income that you pay, how that discretionary income is calculated,
How long you have to pay your loans before they're forgiven
And even what could lead to you getting kicked off of a student loan plan can vary greatly based on the IDR that you choose.
So right now, we'll talk about the core element that unifies all of them. Discretionary income.
And after the break, we'll give you an example of five influential factors and the size of impact they can have on the subsequent student loan payment.
Now to discretionary income. It does not matter which income driven repayment plan you choose. [00:04:00] The base formula for discretionary income is always the same discretionary income equals your adjusted gross income minus your non discretionary income.
And with knowing this formula, we can now discuss, in my opinion,
The five most influential factors that can impact payments under income driven repayment. And those are adjusted gross income percentage of federal poverty level, percentage of discretionary income, length of repayment. And lastly, the standard repayment cap.
After the break, we'll give you details on each of these factors and an example of their impact on your loan payments.
The first factor is adjusted gross income. Adjusted gross income is a tax term that you can find on your previous year's tax return.
The student loan servicer and the department of education use that adjusted gross income from the prior year's tax return to calculate your payment for the ensuing 12 months towards your income [00:05:00] driven repayment plan.
And for all of the examples that we cover, we're going to use a base or standard couple. We're going to take a couple. That is a two person household earning a hundred thousand dollars of adjusted gross income. And we're going to plug these numbers into a standard formula,
That standard formula for discretionary income being adjusted gross income of a hundred thousand dollars minus in this case, 150% of the federal poverty level, which results in a discretionary income of $70,420 for the year. In this example, we're going to use an IDR plan that requires them to pay 10% of that discretionary income towards their loans each year, which results in a monthly payment of $586 a month. This is our core example is what we're going to continuously refer to when giving you an example of impacts of changes in this formula and in these percentages, the first change that we're going to make is we're going to show the impact of [00:06:00] reducing that adjusted gross income.
There are many ways to do. This, which we'll discuss in later episodes, but for our purposes, we're going to take that a hundred thousand dollars income that led to a payment of $586 a month. And however we do it, we're going to reduce it to $90,000 of adjusted gross income. Just by lowering that adjusted gross income by $10,000, it decreases their discretionary income significantly and lowers their monthly payment from 5 86 a month to 5 0 3 a month. Now that's a monthly savings of about $83 just by finding a way to reduce their adjusted gross income.
Next let's talk about percentage of federal poverty level. Now I've told you multiple times that the formula for discretionary income is adjusted gross income minus nondiscretionary income, but what is nondiscretionary income? Well, depending upon the IDR plan you choose,
Non-discretionary income is a certain percentage of what's called the federal [00:07:00] poverty level.
Federal poverty level is an amount of income based on the number of people in your household, where if you make that amount or less, you considered impoverished is what the government uses to figure out who's eligible for certain social services. As an example, you might have a social service that in order to qualify, you have to make less than 250% of the federal poverty level.
And depending upon the IDR plan, you choose, you take that federal poverty level and you multiply it by a certain percentage to find nondiscretionary income. For some plants, it's a hundred percent of federal poverty level for others. 150% for others. 225%.
And you don't have to be a mathematician to understand that looking at the discretionary income formula, if you can find a way to increase your nondiscretionary income, it will decrease your discretionary income, thus decreasing your loan payments.
And there are two ways that you can increase this number.
One by choosing a student loan payment plan that allows you to [00:08:00] multiply I higher percentage against federal poverty level to find non-discretionary AME comp
Too, by increasing the number of people in your household. We will also talk about different ways that you can do that beyond the obvious of getting married or having a child,
But let's show you the potential impact of either choice. If we take our base couple that took a hundred thousand dollars of adjusted gross income, it's attracted 150% of the federal poverty level for a family of two, that would be $19,720 as a federal poverty level. Now, if instead of multiplying 150% of this number, they chose a plan that allowed them to multiply 225% of this number.
It will lead to a reduction in payments of over $123 per month.
Again, a significant difference, especially because as we go through these various factors, you can combine them to have a monumental impact on that in payment.
Now let's go back to the well, and instead of increasing [00:09:00] the percentage of federal poverty level, we'll keep it right where it is at 150% from our base example, but will now increase the number of people in the household. In this family of two Wolf, turned into a family of three when they do so the federal poverty level using this calculation goes from $19,720 to $24,860.
This increases their nondiscretionary income, which lowers their discretionary income and lowers their student loan payment by $64 per month.
Next percentage of discretionary income. There are four different income driven repayment plans, and they all require you to pay varying percentages of discretionary income towards your loans on a yearly basis. Some pay 10%, some pay 15%. There's even a plan that requires you to pay 20% of your discretionary income towards your loans. In the example that we chose, we have a plan that requires 10%, so that's a $586 monthly [00:10:00] payment.
Conversely, if they were to choose a payment that was 15% , they would pay $880 a month. Almost a $300 increase by choosing potentially the wrong plan. And lastly, the 20% payment option would require a monthly payment of $1,173 per month. A doubling of our base example all by choosing a plan that is likely the wrong plan for their finances and the wrong plan for their student loans.
Next length of repayment.
There are plans that require you to pay for 20 years plans that require you to pay for 25 years. There are options soon to come based on department of education news releases that might cap the length of time you pay towards your loans to 10 years in certain circumstances. And this has to be considered because sometimes it's not just about what has the lowest payment. You have an option potentially where you could pay for 20 years on a debt. That's the monthly payment might be a little higher than an option [00:11:00] whose payment may be lower on a monthly basis, but requires you to pay for 25 years.
What do you choose? It's up to you to decide based on having that information at your disposal, but you need to be aware that it's a factor that influences. Is that decision.
And lastly, the standard repayment cap. What this means is that every single year, certain IDR plans will do a calculation. When it comes time to set your next payment. They will look at how much you would have to pay under a IDR plan, and then we'll compare it to what it would cost for you to pay your loans off in full using a 10 year standard repayment plan. And if in that calculation, they determined that you would actually save money by being on the standard plan.
They will kick you off of the IDR plan and place you into a 10 year standard repayment plan. Conversely, their IDR plans that do not have a cap on payments and they do not do this calculation for you.
So an unwitting person might have a skyrocketing income, which will be a [00:12:00] good problem to have, but they may not understand that they're now paying an amount on an IDR plan. That is more than what will be required under a standard plan and may lead to them paying off their loans sooner than the 10-year standard plan and not even having them forgiven, which is a major feature of the IDR plans in the first place.
Now that was a lot to throw at you. But I promise you, this is not the end of the conversation. We're trying to build the foundational elements so that when the time comes to make the decision months from now, you have been familiarized with these concepts.
If you need to listen to this episode a second time, go back. And listen to it a second time. If you join our email list at escape student loan, debt.com, and you have questions, we'll make sure that we cover these questions either via email or in a training or in a separate episode, but we'll keep building upon this knowledge base that you have all you need to know to have your student loans forgiven, reduced reorganized and expedited.
