The idea of getting a bill for zero dollars from your student loan servicer may seem like a scam or too good to be true. Fortunately, due to income-driven repayment plans, a $0 bill is a real thing. These income-driven plans, or IDR plans, charge borrowers based upon what they can afford to pay instead of calculating payments based on how much they owe.
While there are some downsides to a zero-dollar payment, it is still a great option for many.
How do I get a $0 payment?
The biggest limitation with a zero-dollar payment is that it is only available on federal student loans. If you have private loans, it isn’t an option.
The next big limitation is that not everyone will qualify for a $0 payment. To get payments based upon how much you can afford, borrowers need to sign up for an income-driven repayment plan. The income-driven repayment plans, such as IBR, PAYE, and REPAYE, require payments of 10 to 15% of a borrower’s discretionary income. If the government formula determines that you do not have any discretionary income, your payment will be $0 per month.
Payments on income-driven repayment plans are calculated yearly. As income goes up or down, monthly payments will adjust accordingly.
Is a $0 Payment the same as a Forbearance or Deferment?
No. Forbearances or deferments do not usually last a year. There are also limits on deferments and forbearances, but there are no time limits for borrowers making zero-dollar payments on an income-driven repayment plan. Year after year a borrower may qualify for $0 payments.
Perhaps more importantly, $0 payments can count towards student loan forgiveness. All borrowers on income-driven repayment plans can have their loans forgiven after 20-25 years, depending upon the repayment plan selected. Best of all, eligible borrowers who are working in public service can have their zero dollar payments count towards the 120 required payments for public service loan forgiveness.
What is the downside of a zero-dollar payment?
It isn’t all good news for borrowers who qualify for a $0 payment. Even though they won’t be expected to pay anything each month, the student loan interest does not disappear. That means the loan balance will actually increase with each passing month.
Borrowers in this situation should all understand capitalized interest. This is when the extra interest gets added to a borrower’s account. When this happens, the borrower starts paying interest on the extra interest. This can drive the balance up very quickly. Thus, borrowers will want to be careful to avoid unnecessary capitalization of their interest… so don’t miss any income certification deadlines!
Do I need to mail a zero-dollar check or have my lender withdraw $0 from my bank account?
While borrowers have $0 payments, there is no need to send in a check or complete any additional paperwork each month. For the student loans without a required payment, borrowers just need to remember to certify their income before the lender imposed deadline.