For independent contractors and 1099 workers, it might appear to be difficult to calculate monthly student loan payments for income-driven repayment (IDR) plans such as IBR, PAYE, and REPAYE.
How does the government factor in monthly expenses and the fact that some months are much higher paying than others?
Surprisingly, figuring out payments is relatively straightforward. Independent contractors may not be able to use bi-weekly paychecks to verify their income. However, they can still qualify for student loan payments based on what they can actually afford.
An Example: IBR Payments for a Rideshare Driver
If you drive for Uber or Lyft, your income may be very inconsistent. Some months may be lucrative, while others are lean. Being a rideshare driver can complicate student loan repayment.
Making things more complicated is the fact that you are putting miles on your car each month to generate that income. You are also putting gas in the tank. Do the IDR calculations factor in these business expenses?
To get the answer, we need to dig a bit into tax calculations.
Income, Revenue, Schedule C, and the all Important AGI
Generally speaking, revenue describes all of the money that you generate running your business, while income describes the profits you make. In other words, your income is the total revenue minus the expenses.
When calculating IBR payments, the government looks at your income — not your revenue.
For most borrowers, the best way to report income for IBR or PAYE calculations is to use their most recent tax return.
Each year during tax season, individual contractors and 1099 workers have to complete a Schedule C, which tracks the business’s profit or loss. For our Uber driver example, Schedule C calculations include car mileage, depreciation, insurance, and even cell phone costs.
The actual rideshare income is the number that is eventually included in a taxpayer’s AGI or Adjusted Gross Income. A student loan borrower’s AGI is a critical number because Income-Driven payment calculations start with the borrower’s AGI.
If this all sounds too complicated, check out the Department of Education’s Loan Simulator. The Loan Simulator allows borrowers to see their student loan payments on the various federal repayment plans.
What Happens if My Income Goes Down?
Using the most recent tax return is typically to the advantage of the borrower. Many people hope to earn more money than what they did in the previous year. For those with growing incomes, student loan payments are more manageable because they are based upon last year’s earnings.
If your income drops, things are more complicated. Making payments based upon a higher income level is a challenge for some and impossible for others. Fortunately, when borrowers experience a drop in income, they can request to have their IDR payments recalculated immediately.
When this happens, the borrower usually submits their two most recent paychecks. Independent contractors may not have this option.
Instead, they need to work with their servicer to come up with an alternative method of documenting their income. In my experience, the alternative documentation is often a letter prepared by the borrower that shows the revenue and expenses for the previous month. That month’s income then becomes the basis for monthly payments going forward.
The Important of Planning Ahead
For many independent contractors and 1099 workers, monthly income varies greatly.
Meanwhile, IBR, PAYE, and REPAYE payments stay the same for an entire year. During the good months, it is easy to keep up with student loan payments. When business is slow, the monthly payment may be a considerable obstacle.
Thus, it is critical to plan ahead. Build up an emergency fund to help you weather the lean months. If your business starts declining compared to last year, get in contact with your servicer right away to have them calculate new payments.
The Short Version: How do IBR and PAYE Calculations Work for Independent Contractors and 1099 Workers?
- You don’t have to make IDR payments based on your total revenue.
- Payments are calculated using your income (which means the money left over after expenses).
- If your income this year is less than last year, your servicer can lower payments.