The multiple repayment extensions and the SAVE lawsuit have extended the IDR income recertification process again. The exact date when income recertification will restart is still being determined, but borrowers need to start planning. It will most likely start in early 2025.

Based on the ending of most COVID rule changes, income recertification was planned to start again on 1/1/2025. For most borrowers, income recertification has not been required since the start of the National Forbearance due to COVID-19. Many borrowers face significant monthly payment increases once this is reinstated. The current problem is that we do not know when this will officially restart, and most borrowers don’t know their income recertification date.

As stated before, income recertification was to start on 1/1/2025. However, due to the SAVE lawsuit, it will likely be moved back for some or all borrowers. According to the regulation, the loan servicers must give borrowers a 90-day notice of their income recertification. This has yet to happen. We still see a recertification date in January 2025 on client loan files.

Importance of Managing Income for IDR Recertification Date

As more than 60% of student debt dollars are now repaid using an IDR method, annual income recertification is critical to the borrower’s process. This date is unique to each borrower based on the actions and changes they have made while in repayment.

You can ask your loan servicer for this date. It is also available through your federal loan data file on the Studentaid.gov website.

Significant Monthly Payment Increases Are Expected

Many borrowers could see a significant increase in their monthly payments. With all the extensions, most current IDR payments are based on income from 2020 and before. Our client reviews show many clients with payment increases exceeding 25% or higher.

Another issue facing IDR users is their changes in marital status. Many borrowers may have gotten married. Remember, your monthly payment is based on the income you reported in your tax filing. Suppose a couple has only one student loan borrower. In that case, it may be beneficial to file married and separate since only the borrower’s income will be used to calculate the IDR repayment amount.

Limited Loan Servicer IDR Income Recertification Advice

As you can see, Income-Driven Repayment methods are complex. To do the proper planning, the borrower must understand the loan repayment rules, tax filing options, and how to manage their Adjusted Gross Income. The loan servicer cannot provide any tax or personal finance advice.

Many borrowers are frustrated with the long wait times, but they may need to realize that the advice provided may not be complete. This is a significant shortcoming of the process.

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. Depending on the IDR method the borrower is enrolled in, the penalties for not correctly recertifying could be severe.

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.

Managing the Borrower’s Tax Filing Decision

With the new IRS integration, income recertification can be automated. If you consent to using the IRS integration, the annual recertification happens automatically. Selecting this option requires better tax planning, which is often overlooked.

The name Income-Driven repayment was created for a reason, yet many borrowers need help understanding this method. A borrower’s monthly payment is based on their income, not the terms of the loan, like amount, interest rates, and time. Many borrowers believe IDR methods are similar to traditional loans, but that is not the case. It is based on the borrower’s income reported on a pay stub, W2, or 1040 tax return.

Before reviewing their recertification timing, borrowers must realize how important their tax filing status is and properly manage their Adjusted Gross Income (AGI). This plan has a direct relationship to their IDR monthly payment amount, which is based on the income reported on their most recent tax return and available through the new IRS integration.

Take Advantage of Tax Filing Extensions

The IDR recertification can use the IRS’s automated process or the manual process. Similar to the FAFSA, I believe the manual method will be phased out over time. With this new automation comes some advanced planning strategies.

To minimize their IDR income, borrowers 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 annual 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’s income to the current IDR income being used.

The majority of individuals file their taxes by 4/15 of each year. However, they have the option to file an extension that would move the deadline back to 10/15 of that year. An estimated tax payment is still required by the 4/15 date. With proper planning, borrowers could use a timing strategy to their advantage.

For example, a borrower had a recertification date in 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 if they used the automated process. This assumes that the current year’s income was higher than the prior years.

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, not the loan terms.

A car or mortgage has loan terms such as interest rate, loan balance, and interest calculation. Each payment pays a portion of interest and the loan balance. With an IDR payment, this amount may not cover the entire student loan interest.

Many IDR users become confused because they are making a monthly payment, but their loan balance keeps on going up. The explanation is simple: the IDR payment does not always pay the amount of loan interest being charged to the loan. This results in negative amortization. Many borrowers need to realize this is happening because they perceive their IDR method as 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 advises keeping you current and will put the borrower in the lowest payment method, often an IDR method. The Student Loan Repayer software identifies your monthly payment needs to prevent your loan balance from increasing.

IDR Income Recertification Summary

As more borrowers use the IDR methods, properly managing your recertification dates and income will be critical to your financial future. However, this needs to be explained or understood by the borrower.

In the current environment, loan servicers can not provide tax or financial advice to help you lower your payment. Financial and tax professionals don’t understand all of the student loan repayment and forgiveness options, which puts the borrower at a major disadvantage.

At PayForED, we make it our job to offer smart and efficient student loan solutions using our optimized software and resources. We provide information to help borrowers manage their recertification timing options. PayForED has a list of college funding and student loan advisors if you need professional advice.

Disclaimer: PayForED is not a tax consulting firm. A tax advisor needs to review any of the above information since other tax items could impact your results.