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Can I sign up for IBR, PAYE or SAVE if I don’t have a job?

IDR plans like PAYE, REPAYE, and IBR were designed to provide borrowers with affordable payments. For the unemployed, this often means $0 payments.

Written By: Michael P. Lux, Esq.

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The term “income-driven repayment plan” is somewhat misleading. Many borrowers assume that they have to have a job with an income in order to make payments based upon how much money they earn. Fortunately, plans like Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Saving on A Valuable Education (SAVE), are open to the unemployed as well.

In fact, these plans are ideal for people without jobs.

The beauty of income-driven repayment plans is that monthly payments are calculated based upon what you can afford to pay, rather than the total amount you owe.  For unemployed borrowers, that means $0 payments – a significant financial relief for periods of no income.

What happens once I get a job?

For purposes of Income-Driven Repayment (IDR) plans, the government determines what your income is on an annual basis, usually by using your most recent tax return. To remain on an IDR plan, you must recertify your income each year. Once you secure employment, this income will be reflected in your future tax returns. Accordingly, as your financial situation improves, your monthly payments will increase.

This setup is particularly advantageous for recent graduates who are still job hunting. Instead of having to estimate a non-existent income, they can apply for an IDR plan using their current income status and likely qualify for $0 monthly payments for that first year.

However, it’s important to remember that while your monthly payment might be $0, interest will still accrue on any unsubsidized loans. This means your total loan balance will increase. Therefore, while a $0 monthly payment minimizes your immediate financial burden, it might not be the most strategic approach in the long term.

Isn’t a $0 payment the same as a deferment or a forbearance? 

Opting for a $0 payment under IDR plans like IBR, PAYE, or SAVE presents a much better alternative than choosing deferment or forbearance. For starters, deferments and forbearances usually are limited. With income-driven repayment, as long as you recertify your income each year, it is always an option.

One of the biggest advantages of enrolling in the IDR plans is that even those $0 monthly payments still count towards student loan forgiveness. Under the IBR, PAYE, and SAVE plans, student loan forgiveness can be obtained after 20-25 years. Although much strategy goes into deciding whether or not chasing forgiveness is the best route, for borrowers with an uncertain future income, counting those months towards forgiveness is an easy call. In contrast, time spent in forbearance or deferment counts towards nothing.

Furthermore, borrowers who are pursuing Public Service Loan Forgiveness (PSLF) may also benefit from enrolling in an IDR plan. Their $0 payments could count towards PSLF if they find a job with an eligible employer.

What about the monthly interest?

Even though $0 monthly payments might seem like the perfect deal, there are important considerations that borrowers need to be aware of. The most critical concern is regarding interest. As you pay $0 on your student loans, your balance will be growing. Your monthly statement may not show the interest that accrues each month, but your loan servicer has not forgotten about it.

When you leave your income-driven plan, the interest that you didn’t pay is added back to the principal balance. In accounting, this is referred to as interest capitalization. When this happens, you start paying interest on the interest. Interest capitalization is one of the reasons that student loan balances can spiral out of control. Fortunately, interest capitalization can be avoided in many circumstances. It is critical for borrowers to understand what triggers interest capitalization and to take steps to avoid it.

One perk unique to the SAVE plan is the treatment of excess interest. Borrowers without a job should seriously consider SAVE as it prevents interest accumulation and balance growth.

Which repayment plan should I select?

Selecting the right IDR plan can be a bit tricky. Not all borrowers qualify for every repayment plan and some federal loans also have eligibility limitations.

The optimal repayment plan for you can vary based on several factors, including your marital status, how you file your taxes, and the specific types of student loans you hold. This article on picking the best income-driven repayment plan should help you make your decision. Additionally, discussing your options with your student loan servicer can further ensure that you select the most suitable plan for your financial circumstances

How do I sign up?

In the past, the signup procedure was somewhat complicated. Fortunately, the Department of Education has created a single application for all income-driven plan requests. It can be found on the Department of Education’s Student Aid website.

What if I have Parent PLUS loans that are not eligible for IBR, PAYE, or SAVE?

One of the downsides to Parent PLUS loans is that they are not eligible for IBR, PAYE, or SAVE. Sadly, a Parent PLUS loan is not eligible for any income-driven repayment plan.

However, there is a way around this issue. A Parent PLUS loan can be consolidated through federal direct consolidation. The new consolidated loan is then eligible for the Income-Contingent Repayment Plan (ICR). Unfortunately, the ICR plan calls for 20% of your discretionary income, while IBR, PAYE, and REPAYE only charge 10-15%. However, if you are unemployed, 20% of zero is still $0.

ICR is a rarely used repayment plan because the newer income-driven repayment plans are usually a better choice. In this case, ICR is the only income-driven option available, so it is the best option.

Before going through federal direct consolidation, it is essential to understand the consequences of the process before forming your strategy. Furthermore, if you are going to consolidate, be sure to consolidate only the Parent PLUS loans and not any other federal student loans. Combining loan types could result in some of your student loans losing eligibility for certain federal programs. Be sure to talk with your loan servicer about this process so that you do not make any mistakes in your effort to get $0 payments on your Parent PLUS loans.

Final Thought: Income-Driven Repayment could be ideal.

If you are unemployed or barely making enough to get by, income-driven repayment plans can help you lower your monthly student loan bills so that your student loans do not become delinquent or go into default. In many cases, this can mean $0 monthly payments.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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