Each year borrowers on the IBR (Income Based Repayment Plan), PAYE (Pay As You Earn), REPAYE (Revised Pay As You Earn) and ICR (Income Contingent Repayment Plan) must submit income verification to their lender. Most commonly this is in the form of a couple pay stubs or the previous years income tax return. One quite vague question pertains to changes in income.
The full question asks if your income is “significantly different than the income reported on your most recent federal income tax return”
Obviously, the word significant is ambiguous. A significant change for one person could be minor for another. If you look at the form, there is no clarification about “significant”. Some Google research also came up empty.
One Lender’s Answer
To shed some light on this issue, I contacted my lender and asked about income fluctuations from one year to the next. I wanted to know about when the requirement to report a significant change started. Income changes may be easy to track for salaried individuals, but people in sales working on commission might have a very difficult time deciding when their income has changed “significantly”.
The response from my lender wasn’t very helpful:
Thank you for contacting FedLoan Servicing. Your current year on the Income Based Repayment Plan began May 10, 2014 and will end May 10, 2015. You have a fixed 12 month installment of [redacted].
When you reapply for another year on the IBR plan you can submit a new tax return that will reflect your change in income.
How to handle this issue…
There is no clear cut definition of significant. Unfortunately, that means you will have to work with your loan servicer if you are at all concerned about a “significant” change.
If your pay decreases, it is probably in your best interest to reach out to your lender, tell them you are making less, and ask about recalculating your monthly payment. In the event of a pay decrease, the sooner you can have this dialogue with them the better. Because significant is such an unclear term, the more prepared you are to explain why the change in income is significant to you, the better off you will be.
Is a raise a “significant” change in income?
If you receive a raise or have an additional source of income, your interests are obviously different. Clearly, you want your payments to stay low. However, there is always the fear of negative consequences if you are found to have answered the question incorrectly or untruthfully. In this instance, your best bet is to reach out to your lender, explain your situation and ask whether or not you have to have your payments recalculated. If your lender behaves like mine, they will not be interested in doing the extra calculations until the next time required. The key is to get their response in writing so that you are covered if your income change ever becomes an issue.