Income-Driven Repayment Plan Student Loan Forgiveness For Physical Therapists And Occupational Therapists

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Income-Driven Repayment Plan Student Loan Forgiveness For Physical Therapists And Occupational Therapists

Physical therapists and occupational therapists often graduate from their respective programs with substantial student loan debt. Sometimes pursuing student loan forgiveness is the preferred path to take. 

Fortunately, there is more than one way to obtain student loan forgiveness. 

In this article, we will learn about the Income-Driven Repayment Plan’s options for obtaining student loan forgiveness. These plans can be used to obtain forgiveness through the Public Service Loan Forgiveness option or by the options offered by each type of Income-Driven Repayment Plan. This article will only focus on the latter. 

Let’s get started.

What Is An Income-Driven Repayment Plan?

An Income-Driven Repayment Plan is a category of four different student loan plans. These four plans are designed to limit borrowers’ payments to a maximum of 10% or 20% of their discretionary income (defined below) so that they can make smaller monthly student loan payments. 

After making these payments for the required 20 or 25 years, your remaining student loan balance will then be forgiven. 

Do Federal Student Loans Qualify For Student Loan Forgiveness Through An Income-Driven Repayment Plan?

Yes.

Do Private Student Loans Qualify For Student Loan Forgiveness Through An Income-Driven Repayment Plan?

No. 

That is why you should not refinance your federal student loans if you plan to obtain student loan forgiveness through an Income-Driven Repayment Plan.

What Is Discretionary Income?

The Federal Student Aid website defines discretionary income as the value of the income your earned in a year, also known as your annual gross income, after subtracting the value of the poverty guideline.

Income-Driven Student Loan Forgiveness For Physical Therapists And Occupational Therapists

The current value of the poverty guideline is based on the state you live in and the size of your household. The current poverty guideline information shown here is reflective of the data from the U.S. Department of Health and Human Services

Will My Forgiven Remaining Student Loan Balance Be Taxed?

The American Rescue Plan Act in March 2021 allowed all student loan forgiveness to occur tax-free. However, once this expires at the end of 2025, borrowers can be taxed on the remaining student loan balance that is forgiven through an Income-Driven Repayment Plan.

Why Does An Income-Driven Repayment Plan Often Lead To A Higher Student Loan Balance?

The upside of the Income-Driven Payment Plan student loan forgiveness option is that you typically make smaller student loan payments each month and eventually get your student loan balance forgiven. Since you want to get as much of your student loan balance forgiven as possible, it is in your best interest to make your monthly student loan payments as small as possible.

However, since you are making smaller monthly payments, the interest on your student loans may increase your loan balance quite dramatically over a relatively short period of time. That’s why not obtaining the student loan forgiveness you anticipated receiving can be devastating. 

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However, if for some reason it doesn’t work out and you don’t your student loan forgiven, you may end up with more debt than you had to start with. That’s why you failing to obtain the student loan forgiveness you anticipate receiving can be quite detrimental.

For example, if you graduated from physical therapy or occupational therapy graduate school and decided to follow an Income-Driven Payment Plan to get your student loans forgiven in 20 or 25 years depending on the plan (covered in more detail later on), but after a few years you changed your mind and decided to pay your loans off, you will now have a much higher student loan balance to pay off because you had been making small monthly student loan payments that allowed the accumulating interest to gradually increase your student loan balance over time. The amount of the accumulating interest can be shocking. 

What Are The Different Types of Income-Driven Repayment Plans?

There are four different types of Income-Driven Repayment Plans to be aware of:

  1. Income-Contingent Repayment Plan (ICR Plan) 
  2. Income-Based Repayment Plan (IBR Plan)
  3. Pay As You Earn Repayment Plan (PAYE Plan)
  4. Revised Pay As You Earn Repayment Plan (REPAYE Plan)

How Should I Decide Which Income-Driven Repayment Plan Is Best For Me?

Each Income-Driven Repayment Plan is characterized by the following:

  • Which types of student loans qualify
    • Note: Some loans may need to be consolidated to qualify
  • How much your monthly payments will be
  • How long until student loan forgiveness is achieved

Where Can I Learn More About Which Type Of Student Loans Qualify For Each Income-Driven Repayment Plan?

For more information on which student loans qualify for which Income-Driven Repayment Plan, take a look at the table on the Federal Student Aid’s website here

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The highlights here are that Direct Loans qualify for all of the Income-Driven Repayment Plan options. Direct Loans derive from the William D. Ford Federal Direct Loan Program and include the following types of loans: 

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans
  • Direct Consolidation Loans

In comparison, Federal Family Education Loan (FFEL) loans only qualify for the IBR Plan unless they are consolidated which allows them to qualify for the rest of the Income-Driven Repayment Plan options as well. Federal Family Education Loans derive from the Federal Family Education Loan Program. This program stopped issuing new loans on July 1, 2010. Loans in the Federal Family Education Loan Program include the following types of loans:

  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • FFEL PLUS Loans
  • Consolidated Loans

On the other hand, Federal Perkins Loans will have to be consolidated to qualify for all of the Income-Driven Repayment Plan options. Perkins Loans derive from the Federal Perkins Loan Program and are provided with a low interest rate to undergraduate and graduate students demonstrating financial need. This program stopped issuing new loans on September 30, 2017.

What Does Each Income-Driven Repayment Plan Option Offer?

1. The Income-Contingent Repayment Plan (ICR Plan) Option:

Number Of Years To Obtain Student Loan Forgiveness:

With the ICR Plan, your remaining student loan balance will be forgiven after 25 years. 

Monthly Student Loan Payment Amount:

With the ICR Plan, your monthly student loan payments will either be 20% of your discretionary income or the monthly payment required on a fixed 12-year plan, whichever is less. 

Verdict:

The ICR Plan’s monthly payment amount is often higher than the other Income-Driven Repayment Plan options, making this a less commonly used choice.

2. The Income-Based Repayment Plan (IBR Plan) Option:

Number Of Years To Obtain Student Loan Forgiveness:

If you did not have a Direct or FFEL student loan balance when your student loans were taken out on or after July 1, 2014 then your remaining student loan balance will be forgiven after 20 years.

If you did have a Direct or FFEL student loan balance when your student loans were taken out on or before July 1, 2014 then your remaining student loan balance will be forgiven after 25 years.

Monthly Student Loan Payment Amount:

You can only qualify for the IBR Plan option if your monthly payments while on the IBR option would be less your monthly payment on the 10-year Standard Repayment Plan (twelve equal payments for ten years). 

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The amount you must pay each month while on the IBR Plan is based on if you did or did not already have Direct or FFEL student loans taken out on or after July 1, 2014.

If you did not, then your monthly student loan payments will be 10% of your discretionary income (this is the amount that must not exceed how much you would have to pay each month under the 10-year Standard Repayment Plan).

If you did, then your monthly student loan payments will be 15% of your discretionary income (this is the amount that must not exceed how much you would have to pay each month under the 10-year Standard Repayment Plan).

Once you qualify for the IBR Plan option, your monthly payments will never exceed what they would be if you had been on the 10-year Standard Repayment Plan. 

Special Attributes:

– If married, you can file your taxes as married filing separately

– Interest is not capitalized until you exit the IBR Plan but once you do exit then all of the interest is added to your total student loan balance

Qualifying:

In order to qualify for the IBR Plan, the amount you pay in student loans for the entire year while on the Standard Repayment Plan needs to be more than 15% of the following: 

Your annual gross income minus 150% of the poverty line for your household size.

To calculate this, use the following formula:

  1. Amount Paid in Student Loans on 10-Year Standard Repayment Plan for the Year = _____
  2. [Annual Gross Income – (1.5 x poverty line value from table above)] x 0.15 = _______

*If Line 1 is greater than line 2, you can qualify for IBR

Verdict:

The IBR Plan’s monthly student loan payments not exceeding either 10% or 15% of your discretionary income does keep your payments lower. However, as your income increases, so will your monthly payments. Even still, your monthly payments will not exceed how much they would be if you were on the 10-year Standard Repayment plan.

In addition, the IBR Plan can be a great option to keep your monthly payments lower if you are married because it allows you to file your taxes as married but filing separately. Doing this can exclude your spouse’s income when the amount you must pay in student loans each month is determined. If your spouse’s income is not included in this calculation, then you appear to have less income to make student loan payments so the amount you will be expected to pay towards your student loans each month will be less. 

Even so, be sure to talk with your tax professional before doing this. Filing your taxes as married filing separately can increase the amount you will owe in taxes.

Unfortunately, if you exit the IBR Plan, all of the interest will be capitalized. This means that all of the interest you accrued while in the IBR Plan will be added to the student loan balance you owe.

It is also tough to qualify for the IBR Plan since your monthly payments while on this plan would have to be less than it would be on the 10-year Standard Repayment plan. 

Since your monthly payments are based on your income to debt ratio, physical therapists opting to do a residency may consider taking advantage of their lower residency income and apply while in residency to qualify for the IBR Plan option. 

3. The Pay As You Earn Repayment Plan (PAYE Plan) Option:

Number Of Years To Obtain Student Loan Forgiveness:

The PAYE Plan allows your remaining student loan balance to be forgiven after 20 years regardless of where your student loans came from (college or graduate school).

Monthly Student Loan Payment Amount:

With the PAYE Plan, your monthly student loan payments will typically be 10% of your discretionary income but this amount will not exceed the amount you would have to pay each month under the 10-year Standard Repayment Plan.

Special Attributes: 

– If you are married, the PAYE Plan allows you to file your taxes as married but filing separately which can lower your monthly student loan payments.

– Interest is not capitalized until you exit the PAYE Plan, and after exiting interest is limited to 10% of your total student loan balance

Qualifying:

You must demonstrate partial financial hardship to qualify for PAYE.

To do this for the PAYE Plan, the amount you pay in student loans for the entire year while on the Standard Repayment Plan needs to be more than 10% of the following: 

Your annual gross income minus 150% of the poverty line for your household size.

To calculate this, use the following formula:

  1. Amount Paid in Student Loans on 10-Year Standard Repayment Plan for the Year = _____
  2. [Annual Gross Income – (1.5 x poverty line value from table above)] x 0.10 = _______

*If Line 1 is greater than line 2, you can qualify for PAYE

Verdict: 

Remember, keeping the amount you pay towards student loans each month as low as possible should be your goal in order to maximize how much of your student loans are forgiven. The PAYE can be a good option to achieve this.

First, the PAYE Plan’s monthly student loan payments are set to 10% of your discretionary income but not exceeding the amount you would have to pay each month under the 10-year Standard Repayment Plan. This helps keep your monthly payments lower. 

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Further, like the IBR Plan, the PAYE Plan also allows you to file your taxes as married but filing separately. Again, be sure to talk with your tax professional before deciding to do this. 

Perhaps the best aspect of the PAYE Plan, though, is the interest capitalization aspect. If you exit the PAYE Plan either because you choose to or because you can no longer demonstrate a partial financial hardship, the interest capitalized will be limited to only 10% of your total student loan balance. This stands in stark contrast with the IBR Plan, which would add all of the accrued interest to your student loan balance. 

Finally, the PAYE Plan allows you to achieve student loan forgiveness after 20 years regardless of whether your loans came from college or graduate school. The next option covered below, REPAYE, only allows forgiveness for loans coming from college in 20 years while graduate school loans must be forgiven after 25 years.

The downside to the PAYE Plan is qualifying for it. Like the IBR Plan, you must demonstrate a partial financial hardship. Unfortunately, the definition of partial financial hardship in the PAYE Plan is even more limited than the one used in the IBR Plan. 

As previously stated with the PAYE Plan, your monthly payments are based on your income to debt ratio. Therefore, physical therapists opting to do a residency may consider taking advantage of their lower residency income and apply for the PAYE Plan while in residency to qualify. 

4. The Revised Pay As You Earn Repayment Plan (REPAYE Plan) Option:

Number Of Years To Obtain Student Loan Forgiveness:

The REPAYE Plan allows your remaining student loan balance to be forgiven after 20 years if  your student loans derived from undergraduate only. 

If you have any student loans from a graduate school program (e.g. physical therapy or occupational therapy graduate school), then your remaining student loan balance will not be forgiven for 25 years. 

Monthly Student Loan Payment Amount:

With the REPAYE Plan, your monthly student loan payments will typically be 10% of your discretionary income. 

Note that the REPAYE Plan option does not keep your monthly payments under the 10-year Standard Repayment Plan’s monthly payment amount. 

Special Attributes:

The REPAYE Plan provides a subsidy of 50% towards Direct Unsubsidized student loans.

Verdict:

Student loan forgiveness for physical therapists and occupational therapists with graduate school loans can only be achieved after 25 years with the REPAYE Plan. This is a longer amount of time compared to the 20 years required with the PAYE Plan. 

Also, the REPAYE Plan does not prevent your monthly student loan payments from exceeding what you would pay under the 10-year Standard Repayment Plan. Again, the PAYE Plan as well as the IBR Plan options do keep your monthly payments under the 10-year Standard Repayment Plan’s monthly payment amount.

You will also likely have a higher monthly payment with the REPAYE Plan compared to the PAYE Plan and the IBR Plan options because the REPAYE Plan will not separate your income from your spouse’s income even if you file your taxes as married but filing separately. 

However, the REPAYE Plan does offer a few perks that the PAYE Plan and IBR Plan do not.

First, the REPAYE Plan does not require you to demonstrate partial financial hardship in order to qualify for the plan.

Also, while the IBR and PAYE plans cover all of the interest for subsidized student loans, they do not cover any of the interest for Direct Unsubsidized Loans. The REPAYE Plan covers all of the interest for subsidized student loans and also provides you with a 50% subsidy for any Direct Unsubsidized Loans. 

The subsidy can save you a lot money while in the REPAYE Plan, but if you leave the REPAYE Plan then all of the interest will capitalize.

Which Income-Driven Repayment Plan Option Is Best For Me?

As with most everything in the physical therapy and occupational therapy professions, the answer is “it depends” because there is a lot to consider.

For starters, if you can’t demonstrate partial financial hardship to qualify for either the PAYE or IBR plans, then the REPAYE is probably your best option.

Beyond that, there is more to consider. Are you married and willing to file your taxes as married but filing separately? Is a large portion of your student loan balance unsubsidized? Do you anticipate a large increase in income in the near future?

Be sure to take advantage of the Federal Student Aid’s Loan Simulator. This tool will allow you to compare the expected monthly student loan payment of each Income-Driven Repayment Plan.

You can also talk to your loan servicer to obtain this information.

How Do I Get Into An Income-Driven Repayment Plan?

If you are ready to enroll in a plan, you will have to fill out and submit an application.

Directions on how to go about doing this can be found on the Federal Student Aid website here.  

Final Thoughts. . .

Navigating the world of student loans can be quite intimidating and making the wrong decisions can cost you a lot of money not to mention impact your quality of life as well. That’s why I hope you found this information helpful. 

Do you have any questions or information you would like to add? Leave a comment down below!

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