Are you on an income based repayment plan for your federal student loans?

If your federal student loan payment is derived from a percentage of your discretionary income (see my post federal student loan repayment plans), you have an opportunity to save for future AND lower your student loan payments. In other words, you have a rare financial planning opportunity to achieve a double benefit to your personal bottom line.

How do income-based repayment plans work?

Income payment plans are designed for borrowers with high debt loads compared to their income. These include the Income-Based Repayment Plan (IBR), Income-Contingent Repayment Plan (ICR), and Income-Sensitive Repayment Plan. Although the formula can be complex, general idea behind these plans is a percentage of your income (around 10-20%) is used to calculate your payment. Other student loan repayment plans also peg to a percentage of your income, specifically, your discretionary income. For example, the Pay as You Earn (PAYE) and Revised Pay as You Earn (RPAYE) set your loan payments at 10% of your discretionary income.

How can I lower my student loan payments?

Borrowers on an income-based repayment plans can use smart strategies to lower their overall Adjusted Gross Income, or AGI, to decrease annual student loan payments. A few of the best ways to accomplish this are putting money away in tax-advantaged accounts like a Health Savings Accounts (HSA), Flexible Spending Accounts (FSA), 401(k) or 403(b) plans, Traditional IRAs, or Dependent Care Flex Spending Accounts. Check out this IRS website to see what other accounts might be a best fit for your situation.

Can contributing to my Health Savings Account lower my student loan payments?

If you are on an income-based repayment plan, absolutely! Of course, saving what and where depends on your financial goals and overall plan, but this can be a great way to get the double benefit of increased savings for health events and lowering your student loan payment through a decrease in AGI.

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