Los Angeles Student Loan Repayment Lawyers
Income-Based Repayment
After graduation, many people do not immediately secure high-paying jobs. They might barely be able to afford rent and groceries. But when their grace period ends, they can add another monthly bill to the pile: a student loan payment.
What options do you have if your income is too low to cover even the minimum monthly payment? The good news is you can avoid a default by entering an income-driven repayment plan. Income based repayment, called IBR, is very popular. Our Los Angeles student loan repayment lawyer provides an overview.
What is Income Based Repayment?
Those with federal student loans can apply for IBR. It works by capping your monthly payment as a percentage of your discretionary income. Also, at the end of a repayment period, any remaining debt gets wiped.
The IBR rules will depend on when you took out loans. If you took them out before July 1, 2014, you qualify for Old IBR:
- Repayment capped at 15% of discretionary income
- 25-year repayment period
- Federal student loans qualify
If you took out your loans on July 1, 2014 or later, you might qualify for New IBR:
- Repayment capped at 10% of discretionary income
- 20-year repayment period
- Must have federal direct loans
Here is how to calculate your maximum monthly payment. Take your adjusted gross income by looking at your most recent IRS 1040. Then subtract 150% of the federal poverty level for California, which in 2023 is $14,580 for a single person or $19,720 for a two-person household.
What’s left is your discretionary income for IBR purposes. You can then take 15% or 10% of that and divide it by 12. That is your maximum monthly payment. If you make that payment each month on time, you are not in default. However, depending on your interest rate, you might not actually reduce the principal on your loan. For example, someone with $50,000 in total loans and a 6% interest rate would need to pay more $3,000 a year to ever chip away at the principal.
The good news is that either New or Old IBR, you can eventually qualify to have unpaid debt forgiven after 20 or 25 years.
We need to mention that the Biden Administration is continuing to tinker with IBR and has released new rules early in 2023. As advertised, these new rules could reduce your monthly payment by up to 50%. However, the plan is not yet in place—and we aren’t sure if it will ever go into effect. Our firm will stay on top of details to help borrowers.
Also, a different repayment option might be better, such as Pay As You Earn. You should review all options before signing up for IBR.
Income-Contingent Repayment
Millions of Americans have student loans, and monthly payments can overwhelm a budget. After your grace period ends, borrowers must start repaying their loans and are enrolled in a standard 10-year repayment plan. For many people, the monthly bill is just too high. You can’t afford it, so what options do you have?
Income-contingent repayment, called ICR, is one option. If you have Parent PLUS loans, it is your only option. Below, we explain ICR in greater depth and point out that those who can move into a different income-driven repayment plan should probably do so. Contact our Los Angeles student loans lawyer with questions.
ICR at a Glance
ICR works like this. It caps your monthly payment at 20% of your discretionary income. There is a simple way to calculate your discretionary income. It is your adjusted gross income minus the poverty line for your state.
To find out your adjusted gross income (AGI), look at your most recent IRS tax form. Essentially, it represents your income minus certain adjustments for things like contributions to a Health Savings Account or self-employment tax.
The federal poverty line shifts each year and depends on your family size and state, but in 2023 the poverty level for a single person in California is $14,580. You deduct this amount from your AGI.
As an example, a borrower has an AGI of $20,000. Subtract the poverty line amount, which leaves $5,420. At most, this person will pay 20% or $1,084 a year, or a little under $100 a month. Make that payment each month, and you are not in default on your student loans.
Eventually, you can get your remaining debt forgiven—but you need to make payments for 25 years. That’s a long time.
We must mention that lowering your monthly payment has some downsides. Let’s say you have $50,000 in loans with a 6% interest rate. Under a 10-year standard plan, your monthly payment is around $550. But under ICR, you might only pay $100 or even less each month. This means you are not covering even the monthly interest on the loan. Eventually the interest gets added to your principal, which makes your loan balance even bigger—even though you have never been late on a payment.
You Might Have Better Options
If you have a Parent PLUS loan, then ICR can help you get some breathing room on your monthly payment. For many borrowers, ICR is a lifeline that helps them avoid a default and shredded credit.
But if you have other loans, we recommend looking at Income-Based Repayment and Pay As You Earn Repayment (PAYE). The repayment terms are often much more generous than those for ICR.
The team at Wadhwani & Shanfeld can help you choose a repayment option that keeps your head above water. We can also discuss options for dealing with other debts, like credit card debts or medical bills. Once you eliminate them, you should have more money to pay toward loans. Contact our Los Angeles student loans—income contingent repayment lawyer.
Pay As You Earn Repayment
Student loan borrowers looking for some help with their monthly payments have options. One attractive option is Pay As You Earn, called PAYE. Like other income-driven repayment plans, it caps your payment as a percentage of your discretionary income. This repayment plan is not available to everyone. Only certain federal borrowers will qualify, but it can help those living on tight budgets avoid defaulting on their student loans. If you want to learn more, contact a Los Angeles student loans repayment lawyer at Wadhwani & Shanfeld.
Why Should You Choose PAYE?
Let’s say you just can’t make your monthly student loan payment. Federal loan borrowers are automatically enrolled in a 10-year repayment plan, which is standard. But the monthly payment might be too high, so that’s when borrowers start looking at their options. The last thing you want to do is default and have your credit shredded just when you’re trying to establish yourself financially.
PAYE will cap your payment at 10% of your discretionary income—and never above the amount of a 10-year standard repayment plan. Your discretionary income is your Adjusted Gross Income listed on your 1040 form. You then subtract 150% of the federal poverty level amount for your household size. If you’re single in California, that’s 150% of $14,580.
Take what’s left over and multiply by 10%. That’s the maximum you will pay in a year. (Divide it by 12 to see your monthly amount). If you stick to paying this amount each month, you won’t go in default. The government won’t report you as delinquent, and your credit score won’t tank.
After 20 years of payments, you should be able to wipe out whatever remains unpaid. This means people with very high balances can eventually eliminate them if they stick to repayment for two decades.
PAYE has some advantages over other income-driven repayment options, like Income-Based Repayment. The big difference is what happens to unpaid interest. Let’s say you have $100,000 in student loans at 6% interest. In one year, you will pay $6,000 for interest alone. But let’s imagine your discretionary income is only $30,000. Ten percent is only $3,000. In short, you are not even paying enough to cover the interest for the year.
With other repayment plans (like IBR), that unpaid interest gets “capitalized,” meaning it is added to the principal. The PAYE program actually caps the amount that can be capitalized to 10% of your loan balance. Under PAYE, you will ultimately end up paying less on the loan.
Revised Pay As You Earn—or REPAYE—is even more generous when it comes to capitalized interest. You should discuss PAYE and REPAYE to determine which option benefits you the most.
Let’s Talk about Your Loans
Getting student loans discharged in bankruptcy is notoriously hard. Nonetheless, distressed debtors do have options, including IBR and other income-driven plans. To review your debts with an expert, call Wadhwani & Shanfeld today. Our Los Angeles student loan repayment lawyers are hard at work helping debtors get on top of their debts.
