It’s been awhile since I’ve done a “tips” type of blog post, so here you are.
Income-Based Repayment (IBR) is that great federal student loan repayment plan that allows borrowers to make monthly payments based on their income. Your IBR payment is calculated as 15% of your “discretionary income,” which is your taxable income adjusted for poverty limits and family size.
One of the easiest ways of documenting your income for purposes of getting onto IBR is to provide a copy of your tax return. Your federal loan servicer will use your Adjusted Gross Income (“AGI”) figure on your tax return as the basis for determining your monthly IBR payment. But AGI is not just your gross wages or salary. It is, as the name implies, “adjusted.” It is the portion of your salary/wages that is taxable. By making pre-tax deductions or adjustments, you can lower your AGI, and thus reduce your IBR payment. Some examples of expenses or deductions that can lower your AGI are:
- Pre-tax retirement contributions, such as to a government pension fund, 401(K) or 403(B), or traditional Individual Retirement Account (IRA)
- Student loan interest paid during the tax year (up to a point)
- Certain health care-related expenses, such as through a health care Flexible Spending Account
- Certain state and local taxes
- Charitable donations
- Job-related expenses if you are self-employed or have your own business
- Mortgage interest
- Certain moving expenses for job-related reasons
All of these adjustments can make a big difference on your monthly IBR payment. For instance, if your salary is $50,000 per year, but after deductions and adjustments your AGI is $43,000, your IBR payment for your AGI could be $90-$100/month lower than your IBR payment based on your gross earnings, saving you over $1,000 for the year.
To learn more about how you can tweak your AGI to reduce your IBR payment, talk to an accountant or qualified tax professional.
