How to Reduce Loan Payments in an Income-Driven Repayment Plan

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Mark Kantrowitz

By Mark Kantrowitz

June 26, 2020

Borrowers who are repaying their student loans in an income-driven repayment plan can cut their monthly student loan payments by reducing income, by increasing family size and, if married, by filing separate income tax returns.

Cutting Loan Payments by Cutting Adjusted Gross Income

Lower income can result in a lower monthly student loan payment if the borrower’s loans are in an income-driven repayment plan. However, usually the increase in the borrower’s net income will exceed the increase in the loan payment. But, there are a few circumstances in which a lower income works to the borrower’s advantage.

The monthly loan payments under income-driven repayment are based on a percentage of discretionary income. Discretionary income is based on adjusted gross income (AGI). AGI is reduced by capital losses of up to $3,000 and by certain adjustments to income, such as alimony paid, educator expenses, the tuition and fees deduction and the student loan interest deduction. So, you can reduce your student loan payments by increasing these adjustments to income. 

A $3,000 decrease in AGI can cut the monthly loan payments by $25 to $50, depending on the type of income-driven repayment.

Your loan payments under an income-driven repayment plan may also decrease when you retire, if most of your income comes from Social Security retirement benefits.

The taxable portion of Social Security benefits is included in AGI. Up to 85% of Social Security benefits are taxable, depending on income, tax filing status and a complicated formula. 

Cutting Loan Payments by Increasing Family Size

Increasing household size can also reduce your student loan payments under income-driven repayment. 

Discretionary income is defined as the amount by which AGI exceeds 150% of the poverty line. The poverty line is based on household size. Increasing household size will increase the poverty line, reducing your monthly student loan payments under income-driven repayment.

Each additional family member will reduce your student loan payments by about $50 to $100. 

Cutting Loan Payments by Filing Separate Income Tax Returns

The type of tax return filed can affect the monthly loan payment under an income-driven repayment plan for married borrowers. 

  • If a borrower is married, the monthly payment under income-based repayment (IBR), pay-as-you-earn repayment (PAYE) and income-contingent repayment (ICR) is based on just the borrower’s income if the borrower and spouse file separate income tax returns. This will yield a lower monthly loan payment.
  • If the borrower files a joint income tax return, the monthly payment is based on the joint income of borrower and spouse.
  • The revised pay-as-you-earn repayment plan (REPAYE) bases the monthly payment on joint income regardless of the tax filing status of the borrower. 

Thus, borrowers who are married can reduce their monthly student loan payments by choosing ICR, IBR or PAYE and filing separate federal income tax returns.

A good place to start:

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