The multiple extensions of the Student Loan National Forbearance has been a great benefit for many borrowers. As the expected 5/1 restart is approaching, borrowers who use the Income-Driven Repayment (IDR) methods will need to do some additional planning. The good news is that the required annual IDR recertification is not required until 11/1/2022.
These payment extensions do not match up directly to the recertification dates that an IDR user usually faces. The CARES Act originally extended the annual IDR recertification for 12 months. Due to the additional Biden administration changes, the recertification date was extended again. This additional extension will depend on which action the borrower took during the national forbearance period. Borrowers still have the option to continue using their current recertification date if the numbers work to their advantage.
Importance of Managing Income for IDR Recertification
Before reviewing your recertification timing, borrowers must realize how important their tax filing status and proper management of their Adjusted Gross Income (AGI) is to their IDR monthly payment amount. A borrower’s IDR monthly payment is based on the income reported on their most recent tax return and is available in the IRS database.
Due to the various extensions, a borrower’s 2020 and 2021 tax returns will be critical in managing their new repayment starting on 5/1/2022. It will also impact their decision to use the additional extension of their recertification date. This is especially true for people who got married, divorced, or had major income changes.
New IDR Recertification Date
Under the new extension, borrowers with recertification dates of October 2022 and before will have the option to recertify their income using the same month but in 2023. For those starting IDR recertification in November 2022 and after, your recertification date will be on the same month and in 2022 or 2023.
As an example, if the current recertification date is June 2022. The borrower would have the option to recertify on June 2022 or postpone recertification until June 2023. This is because recertification is not required until after 11/1/2022.
The borrower will need to evaluate which income number will work best for their recertification. If their current income is lower than what is being used to calculate their IDR payment then it may be beneficial to keep the June 2022 date. This is because the IDR would reflect a lower income number then would have been submitted for recertification.
Limited Self Reporting Your Income Rule
Due to COVID, there is a special self-reporting income rule that was put into place. This rule expires on July 31, 2022. It allows borrowers who have Federal Direct Loans to report their income without the normal tax form documentation.
To take advantage of this option, the borrower will use the normal IDR application. At step 2 (Income Information), select “I’ll report my own income information”.
People Who Did Not Do Recertify During Extensions
For those borrowers who did not recertify during the entire national forbearance period, your recertification month will not be changing. The Department of Ed has not updated the loan recertification dates at this time but it is recommended that the borrower review their timing and income to minimize the new IDR payment. If you are unsure, a call to your loan servicer may be a good idea to confirm your date.
People who Did IDR Recertification During Extensions
People who did recertify on their renewal date during the national forbearance will have 2 options to select from. The first option is to delay your recertification. The second option is to stay on your annual recertification date. This could be a difficult decision and you will need to run your numbers to calculate what will happen when payment restarts in May 2022.
Take Advantage of Tax Filing Extensions
In the coming years, the IDR recertification will be automated and the manual process will be minimized for most borrowers. This will create a new problem for borrowers since better tax planning will be required.
Within the next two years, the IDR recertification process will be a direct data feed from the IRS to the Depart of Ed and the borrower’s loan servicer. For borrowers to minimize their IDR income they will need to better manage the income on file with the IRS at the time of their recertification.
This will require borrowers to understand the timing of their tax filing submission and their IDR recertification date. By properly managing this, the IDR income being used at the recertification date could be 6 – 18 months old. Each year the borrower will need to compare their current year income in comparison to the current IDR income being used.
The normal individual tax filing period is normally 4/15 of each year. Individuals have the option to file an extension that would move it back to 10/15 of that year. An estimated tax payment is still required by the 4/15 date.
As an example, a borrower had a recertification date of May. They completed and submitted their taxes in March. The taxes would likely have been processed and are now available for the May IDR recertification. This borrower could have opted to file a tax extension and waited until after their May recertification date. This would have guaranteed that the prior year’s income would have been used for the recertification. This is assuming that the current year’s income was higher than the prior years.
New IDR Users
The borrower’s advantage to using the federal loan repayment methods is the flexibility. As COVID has impacted many people’s income, some have converted to using an IDR method to better manage the monthly payment. Using one of the IDR methods is a great way to make a minimal payment and avoid forbearance or default. For most, your recertification date will remain the same since your recertification date is after the original extension and grace period. The annual recertification date is established once your IDR application is approved.
Penalty for Not Recertifying
All these extensions and changes have made a complex process even more confusing. It is critical for the borrower who is using an IDR method to know when to recertify. The penalties for not properly recertifying could be severe depending on the IDR method that the borrower is enrolled in.
Here are the most common penalties that a person could face:
- Student interest capitalized (Increase loan balance amount)
- Loss of loan forgiveness months credit while not enrolled in an IDR method.
- Minimum of one 10-year standard payment for re-entry to the IDR method
- Re-enrollment may take additional time.
Reviewing IDR Payment Amount
A common misunderstanding of the IDR methods is that this repayment amount is like a car loan or mortgage. It is not. An Income-Driven Repayment (IDR) amount is based on the person’s income and not the terms of the loan.
A car or mortgage has loan terms such as interest rate, loan balance, and interest calculation. Each payment has a portion being paid to interest and the loan balance. With an IDR payment, this amount may not cover the entire student loan interest.
Many IDR users become confused given that they are making a monthly payment, but their loan balance keeps on going up. The explanation is simple; the IDR payment is not always paying the amount of loan interest being charged to the loan. This results in negative amortization. Many borrowers do not realize this is happening since their perception is that their IDR method is a traditional loan payment which it is not.
A way to review your payment is to find a resource like the PayForED Student Loan Repayer. Typically, the loan servicer’s advice wants to keep you current and will put you in the lowest payment. This is often an IDR method. The Student Loan Repayer software identifies what your monthly payment needs to be to avoid your loan balance from going up.
New IDR recertification Date Summary
The CARES Act, Presidential Executive Orders, and the Consolidated Appropriation Act have made the restart of student loan repayment more confusing. As more borrowers will be using the IDR methods, properly managing your recertification dates and income will be critical to your financial future.
At PayForED, we make it our job to offer smart and efficient student loan solutions using our optimized software and resources. We do this is by providing information to help borrowers manage their recertification timing options. If you need professional advice, PayForED does have a list of College Funding and Student Loan Advisors.
Disclaimer: PayForED is not a tax consulting firm. Any of the above information needs to be reviewed by a tax advisor since other tax items could impact your results.
