One of the biggest headaches about IDR repayment is the yearly income recertification.
Certifying income wasn’t particularly hard or complicated, but it was tedious. Missing the deadline was often an expensive mistake, and even when borrowers did everything right, servicer delays could cause a pause in progress toward loan forgiveness.
Fortunately, it looks like those days are over. Automated income certification is here.
How Does Automatic Income Certification Work?
When a borrower submits an IDR request, they can authorize the Department of Education to pull Federal Tax Information (FTI) annually.
Instead of submitting a yearly income certification form, loan servicers can access the required information from the IRS and update borrower IDR payments without the borrower taking any action.
Borrowers don’t have to opt into the automated process, and should they want to withdraw the authorization, they can opt-out on studentaid.gov.
The benefit to opting in is that borrowers will no longer have to remind themselves to recertify. They also won’t have to play guessing games regarding servicer processing times to ensure no hiccups.
What changed? Historically, this new automated process was prohibited by federal law. Specifically, other federal agencies could not access IRS records. The recently passed FUTURE Act now allows some limited data sharing between the IRS and the Department of Education.
The Start of Automated Income Verification
Borrowers are still required to opt-in to the automated process. Thus, once payments resume, at least one income verification will be necessary for borrowers.
This lines up nicely with the new SAVE plan. For the vast majority of borrowers, the new IDR plan will be the best IDR plan. When they sign up for SAVE, they can also sign up for automatic income verification.
One year from now, when these borrowers will see their monthly payments automatically updated without having to take any additional action.
The Process for Updated Payments
We are still many months away from the first automated IDR payment updates, but we have a good idea of what it will look like.
Approximately one month before the updated payment takes effect, borrowers should get a letter from their servicer detailing their new monthly bill. If the borrower’s income increases, the monthly bill will be higher. If the borrower’s income drops, the bill will be lower.
When borrowers receive this letter, they can review it for errors and consider repayment plan changes. For example, a borrower who started a new job or got a big raise may choose to change from an IDR plan to a balance-based plan like the graduated repayment plan. Additionally, if the borrower’s family size has changed, they will also need to submit updated documentation.
The Mistake to Avoid: Don’t Wait for Updates to Lower Payments
Borrowers on IDR plans need to have their income certified yearly. The new automated process makes it much more manageable.
However, borrowers do not have to wait out the entire year to lower their monthly payments.
If you experience a drop in income, you can request an immediate update to your IDR plan. Borrowers who lose their job can often qualify for $0 per month payments and an interest subsidy that will cover all of the interest that accrues during that time.
Likewise, if your family size grows, you can immediately update your monthly IDR bill. With SAVE’s generous discretionary income formula, adding a child could mean much lower monthly payments.
Sherpa Tip: Family size is defined to include unborn children. Announcing a pregnancy to the Department of Education probably isn’t the most exciting announcement to make, but the sooner you do it, the sooner you can enjoy lower monthly payments.
Limitations on Automated Payment Updates
There are a couple of limitations to the new automated process that are worth pointing out.
Only federal direct loans are eligible. Borrowers with FFEL loans or Perkins loans must consolidate to benefit from automatic income certification. The good news for these borrowers is that now is a great time to consolidate. They can benefit from the IDR count update and gain eligibility for the lower payments of the new SAVE plan.
Payments are based on recent tax returns. Some borrowers are not required to file tax returns. Others have recent tax returns that don’t adequately reflect their income. If you fall into either of these categories, alternative documentation of income may be required.
The Big Winners in the New Process
The new certification process will help the vast majority of IDR borrowers.
This change is especially noteworthy for the following borrowers:
- Seniors living on social security – Social Security check garnishment has become a big issue, and many seniors have student loans from their own education or their child’s education. The yearly IDR process was especially difficult for this group, and automating it could mean many seniors pay $0 per month until their loans are eventually forgiven.
- Low-income borrowers who don’t want to engage with servicers – Though federal student loan repayment has gotten easier and more affordable over the years, many borrowers mistakenly assume their debt is unaffordable and refuse to engage with servicers. Completing a single IDR request could now get these borrowers on the path to forgiveness. The Fresh Start program may also be particularly beneficial to this group.
Staying Up to Date on Student Loan Changes
One of the biggest criticisms of federal student loan repayment has been that it is overly complicated.
Automating income certification for IDR borrowers is a big step in the right direction.
However, there is a potential downside. Many borrowers use their yearly income certification as a time to get up to speed on the latest news in federal student loan repayment. With automatic income certification, borrowers must find new ways to stay updated on any changes to repayment rules.
To help with this issue, I’ve created a monthly newsletter to keep borrowers up to date on the latest changes and upcoming deadlines. Click here to sign up. You’ll receive at most one email per month, and I’ll do my best to ensure you don’t overlook any critical developments.