Can I Enroll in an Income Based Repayment Plan without a Job?

Michael Lux Blog, Student Loans 2 Comments

When discussing student loans, the repayment plans based upon your income are often described as the best options available.  What happens if you are out of work and don’t have any income?  How much do you need to make in order to sign up?

The Good News

The good news here is that even if you are unemployed, you can still sign up for one of the income driven repayment plans.  These plans include Income Based Repayment (IBR), Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE).

These plans are truly based upon your income, so if you are not making any money, your monthly payment each month will be $0.  In fact, if your income puts you below 150% of the federal poverty level for your household size, your payment will still be zero.  It is only income that you make beyond poverty level that determines how much you pay each month.

Another bit of good news here is that the $0 payments actually count towards student loan forgiveness.  This includes forgiveness under the ten year Public Service Student Loan Forgiveness program as well as the standard forgiveness under your repayment plan (normally 20 or 25 years).

How do I show my income?

The best way is to use your most recent tax return.  When you apply, you can actually authorize the IRS to send the Department of Education your income information.  Once they see your yearly income at zero or close to zero, you will be paying $0 per month on your federal student loans for the next year.

The key with the income verification is to remember to get it done on a yearly basis.  If you forget, your payment jumps back up to what it would be on the 10-year repayment plan.

What about the interest?

Even though a $0 payment may seem like the perfect deal, there are still some concerns that borrowers should understand.  The most important concern is the interest.  All the while you pay $0 on your student loans, the balance will actually be growing.  Your monthly statement may not show the interest that accrues each month, but your loan servicer has not forgotten about it.

Once you leave your income driven plan, the interest that you didn’t pay is added back to the principal balance.  In accounting this is often referred to as interest capitalization.  When this happens you start paying interest on the interest.  This concern is one of the main reasons it is critical to submit your yearly income verification on time.  If you are late all the extra interest gets added to your account and you start having to pay interest on the interest.

It is also worth noting that not all income driven repayment plans are the same in the way they treat interest.  While all the plans add interest back to your account once you leave the income driven plan, the amount of interest varies.  With the REPAYE plan, the Department of Education actually pays half of the interest that accuses each month.  So if you balance is growing by $100 each month due to interest, the Department of Education is actually paying $50 of that interest.  With PAYE and IBR, this perk does not exist.  $100 of unpaid interest will be added to your account in full once you leave the plan you are one.

Have a Plan

As you can see from the interest concerns, paying $0 per month is not a get out of debt free card.  Rather, it is a tool to help you work your way out of debt.

If you just graduated, odds are your income will be pretty low on your most recent tax return.  Use this first year of artificially low payments to attack some of your other higher interest debt, such as private loans or credit cards.

Remember, just because you technically owe $0 each month does not mean you are not allowed to pay more than that.  The key to effective student loan elimination is not to just think about next month or even next year but to have a play to eliminate your student loans while spending as little as possible.