How Do You Pay a Student Loan When Self Employed?

Paying your student loans when you’re self-employed can be challenging. Your income isn’t predictable, but the payment demands from your loan servicerLoan ServicerThe company that manages a borrower's federal student loan account, processes payments, and handles applications for repayment plans, deferment, forbearance, and forgiveness on behalf of the U.S. Department of Education. are. So what do you do?

Well, if you have private student loans, you can ask for an interest-only loan payment. You can also ask for a deferment or forbearance. But both of those options are temporary. If your income doesn’t improve over the years, those payment options may run out. And then you’re looking at attempting to negotiate a settlement or filing bankruptcy.

Thankfully, getting an affordable monthly payment for your federal student loans as a small business owner is easier. You just need to choose the right repayment plan for your loan type and then produce proof of your taxable income.

You’ll learn what’s considered acceptable proof of taxable income for self-employed student loan borrowers in this post.

Before we do that, let’s go over a few basics.

Student Loan Repayment

The Department of Education offers 5 income-driven repaymentIncome-Driven Repayment (IDR)A category of federal student loan repayment plans that calculate monthly payments based on income and family size rather than loan balance. Any remaining balance can be forgiven after 20–25 years of qualifying payments. plans:

1. The Revised Pay As You EarnRevised Pay As You Earn (REPAYE)A former federal income-driven repayment plan that capped payments at 10% of discretionary income, with forgiveness after 20 or 25 years. REPAYE was replaced by the SAVE Plan in 2023. Plan (REPAYE plan)
2. The Pay As You EarnPay As You Earn (PAYE)A federal income-driven repayment plan that caps monthly payments at 10% of discretionary income and forgives remaining debt after 20 years. It is only available to borrowers who took out their first federal loans on or after October 1, 2007. Plan (PAYE Plan)
3. The Income-Based RepaymentIncome-Based Repayment (IBR)A federal income-driven repayment plan that caps monthly payments at 10% or 15% of discretionary income, depending on when the loans were taken out. Remaining debt is forgiven after 20 or 25 years of qualifying payments. Plan for New Borrowers
4. The Income-Based Repayment Plan (IBR Plan) and
5. The Income Contingent Repayment Plan (ICRIncome-Contingent Repayment (ICR)The oldest federal income-driven repayment plan, with payments generally set at 20% of discretionary income or a fixed 12-year amount, whichever is lower. It is the only IDR plan available to Parent PLUS borrowers after consolidation. plan)

Not all federal student loans are eligible for each IDR plan. For instance, the PAYE plan requires you to have a Direct LoanDirect LoanA federal student loan made directly by the U.S. Department of Education under the William D. Ford Federal Direct Loan Program. Most federal student loans issued since 2010 are Direct Loans. and borrowed it after September 2010.

Because of that, make sure you choose the right repayment plan for the type of federal student debt you have.

You can find what type of student loan debt you have by signing into studentaid.gov.

How your monthly payment is calculated

Each repayment plan calculates your monthly payment by looking at 3 things:

1. Your federal loan balance
2. Your family size
3. Your discretionary incomeDiscretionary IncomeFor federal income-driven repayment plans, a borrower's adjusted gross income minus a set percentage of the federal poverty guideline for their family size. Monthly IDR payments are calculated as a percentage of this amount.

The Department compares your loan balance against your income to see if you have a partial financial hardshipPartial Financial HardshipA federal eligibility standard used historically for IBR and PAYE, where a borrower qualifies if their calculated IDR payment is lower than the payment they would owe under a 10-year Standard Repayment Plan.. Some repayment plans (IBR and REPAYE) require you have that hardship to be eligible for that repayment option.

The Department uses your family size to help calculate your discretionary income.

Let me explain.

The Department takes your family size and looks up the poverty guidelinesPoverty GuidelinesAnnual income thresholds published by the U.S. Department of Health and Human Services, used in federal student loan programs to calculate discretionary income and determine eligibility for certain repayment benefits. for the family size in your state of residence. It then multiplies that amount by either 100% or 150% and then subtracts the resulting number from the income documentation you provide. The final number is your discretionary income.

Depending on the repayment plan you chose, your monthly payment will either be 10%, 15%, or 20% of your discretionary income.

Acceptable proof of income

When applying for an IDR repayment plan, you’ll have to provide proof of your income.

(Depending on how you filed your income tax return, you may need to provide your spouse’s income.)

The Department lists acceptable proof of income at the bottom of page 2 of the IDR application.

Acceptable proof includes:

• Your most recent federal income tax return from the past 2 years
• A paycheck from the past 90 days
• A letter from your employer stating your gross income per pay period
• A letter from you stating your gross income per pay period

If your income is consistent year to year, check your payment amount using your income tax return. Your loan servicer will use your adjusted gross incomeAdjusted Gross Income (AGI)A borrower's total taxable income minus specific deductions, as reported on a federal tax return. Federal income-driven repayment payments are generally calculated using AGI. to calculate your monthly payment. Your AGI is your income that remains after you contribute to your 401k and report your business losses. Using your AGI may give you a lower monthly payment than using your gross income.

You don’t have to provide proof of untaxed income to your loan servicer, just the income you pay taxes on.

For my self-employed clients, I’ve used:

• A letter signed by them saying their gross monthly income is X
• Copies of checks they received from gigs in the past month
• Screenshots from their gig accounts (Instacart, Uber, Lyft, etc.)

The rules for providing proof of income are pretty lenient. The critical thing you want to do is make sure your documentation is legible, and you clearly mark how often you get paid. Make the job easy for your loan servicer.

When your income changes

Here’s the thing about self-employment income: it changes—a lot.

I tell my friends that owning your own business places you on a roller coaster of emotions. Some moments you think entrepreneurship is the greatest thing ever. The next moment you’re ready to die.

The good thing about federal student loans is that when your current income drops, you don’t have to worry about how you’re going to make your monthly payment.

All you have to do is contact your loan servicer and request your student loan payment be recalculated early due to a change in your income.

You can request a recalculation of your payment amount at any time.

When you do, all you need to do is submit a new IDR application and proof of your changed income. A few weeks later, your loan servicer will contact you with a new payment amount and let you know that payment is good for the next 12 months.

And if your income goes up the next month? You’re under no obligation to report your increased income. You can wait until your current repayment ends and then recertify based on your income at that time.

Loan forgiveness for self-employed borrowers

There’s no loan forgiveness program for self-employed borrowers.

There are only loan forgiveness programs every other student loan borrower is eligible for:

income based repayment loan forgiveness after 20 to 25 years of loan repayment

People want to know, “can I get PSLFPublic Service Loan Forgiveness (PSLF)A federal program that forgives the remaining balance on Direct Loans after 120 qualifying monthly payments made while working full-time for a government or qualifying nonprofit employer. loan forgiveness if I own my own nonprofit?”

My answer is, of course, you can. There’s no rule against you qualifying for loan forgiveness simply because you own the company. That’s not a requirement.

What is a requirement, however, is that you work full-time for a qualifying public service employer and that you receive a salary.

I’ve found that most people have trouble meeting the last requirement.

Their nonprofit isn’t earning enough money to pay them a legitimate salary.

But what if you are a borrower who is earning enough income?

In that case, just make sure you meet all the requirements to keep your nonprofit in good standing with the state and federal government. Do that, and keep making your qualifying payments under your repayment plan. After 120 months of payments, submit your application and wait to get your federal loans forgiven.

Related: 1099c and Student Loan Forgiveness

Student loan repayment assistance program

The Coronavirus Aid, Relief, and Economic-Security Act (CARES Act) gave some self-employed borrowers an added tax benefit. Under the Act, payments made by the employer towards its eligible employees’ student loan principal and interest may be excludable from the employee’s income. For the payments to qualify, the payments must be made under an education assistance program.

Under this program, you, as an employer, can give yourself, as an employee, up to $5250 in tax-free student loan repayment assistance during a tax year.

Plus, as an employer, you get credit for a payroll tax exclusion. Basically, the payments made towards an employee’s student loans aren’t subject to payroll taxes.

Should I refinance

In all my years of doing this, I can think of only one type of borrower (freelancer or otherwise) I have ever advised that refinancingRefinancingTaking out a new private loan to pay off one or more existing student loans, usually to lower the interest rate or change the repayment term. Refinancing federal loans into a private loan eliminates federal benefits like IDR and PSLF. their federal loans with a private lender was a good idea.

That type of borrower? A borrower with a steady, predictable income who can reasonably expect to never be unemployed for longer than a handful of months (aka, borrowers with a traditional job).

Who meets that description? Typically, members of the armed forces and medical professionals (doctors, nurse practitioners, etc.).

For everyone else, I think student loan refinancing is a terrible idea.

Sure, you may get a better interest rate. But you lose too many benefits in the process.