What “Significant Change in Income” Means for Income-Driven Repayment

The 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. plan regulations don’t define “significant change in income”. Neither does the IDR application. Instead, the current version of the application asks “has your income significantly decreased since you filed your last tax return?” After that, it provides examples of reasons why your income would decrease:

• job loss
• drop in income
• divorced/separated your spouse
• no longer able to access your spouse’s income information.

While those examples are great, they don’t help us understand the adverb “significantly”. Is it significant if your income decreases by $1 thousand? What about $10 thousand? Or $30 thousand?

In my opinion, instead of trying to establish a dollar amount threshold to say this change in income is significant or that change in income is significant, the better test is to ask “how will my payment change if I use a pay stub versus the 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. on my federal income tax return?”

Normally, 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. uses your adjusted gross income and family size to determine your discretionary income, and, in turn, calculate your monthly payment.

When you use a paystub as income documentation that formula changes. It changes because your loan servicer will use your gross income rather than your AGI. In using your AGI, 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. may end up being higher than what it would be if you had used your tax return. And if your discretionary income is higher, your monthly payment amount will be higher, which is the exact opposite of what you want.

Learn More: Who Do You Contact If You Have Questions About Repayment Plans?

Fraud considerations

In 2019, the Government Accountability Office reviewed over 76 thousand IDR applications from borrowers seeking to pay their student loan debt under a repayment plan based on their income.

In their review, they found a sizeable amount of borrowers who reported have zero taxable income, likely had some income during the repayment period. As a result, they recommended the Department of Education implement processes to check the income a borrower self-reports.

What if your income increases?

No matter if you’re in the IBR plan, PAYEPay 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, REPAYE plan, or, if you have a Parent Plus Consolidation Loan, the 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, the only time you have to report an increase in income is when it’s time to recertify for the next student loan repayment period. Before then, you’re under no obligation to report increases in income due to bonuses, raises, commission, etc.

Related: PAYE vs REPAYE: Which is the Best Repayment Plan for You

The same is true if you got an inheritance during the year. You don’t have to worry about an inheritance affecting your monthly payment amount — at least not until it’s time to recertify.

When that time comes, recertification, the question you’ll have then is how do you keep your loan payment low when your income increases?

Here’s what I do when student loan borrowers reach out to me for help.

Dealing with Increased Income at Recertification

When I know their income has increased or will increase when it’s time to recertify, I have them hold off on filing a new federal income tax return. By doing that, it allows me to analyze whether it’s better to use the previous year’s tax return.

If it is, cool. We’ll use that as a proof of their income.

But if it isn’t, then I have them prepare a draft of their current federal income tax return. That way we can get an estimate of their new AGI and their tax liability.

I also start looking at their paystubs. Are they salary? Is their gross income consistent check to check?

Basically, I’m seeking to explore all options for trying to get the lowest monthly payment I can get for their student loans.

UP NEXT: How to Recertify and Get a Lower Student Loan Payment