How to Decide Whether to Advise a Borrower to Change Repayment Plans

When clients wish to change their repayment plan, consider these steps to inform and educate the borrower about the affect on their finances. 

For federal student loans, answer this question by taking these steps:

Step 1 - Determine which repayment plan(s) your client is presently enrolled in (use your client’s National Student Loan Data System record).

Example: The client is enrolled in the original Income-Based Repayment plan that sets payments at 15% of “discretionary income”.

Step 2 - Establish your client’s eligibility for other attractive federal student loan repayment plans (such as the various Income-Driven Repayment plans). [1]

Example: The client is not eligible for Pay As You Earn but is eligible for Revised Pay as You Earn.

Step 3 - Evaluate the pros and cons of each repayment plan for which your client is eligible.

Pros: Payments would be 10% instead of 15% of discretionary income; negative amortization is limited under REPAYE; etc.

Cons: REPAYE has no payment cap; long-term forgiveness for graduate/professional borrowers takes 25 years instead of 20; payments must be based on joint income; etc.

Step 4 - Determine whether the benefits of changing repayment plans outweigh the impact of triggering capitalization of unpaid accrued interest.[2]

Example: The increased principal balance offset by the value of increased cash flow.


Counseling a Borrower About How to Change Repayment Plans

When talking to client’s about repayment plans and the pros and cons of switching, advisors have key counseling opportunities such as:


1. Clearly explain that there are trade-offs when switching repayment plans.


Example: Advisor: “There are many Income-Driven Repayment Plans: Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR). There are numerous differences between the available repayment plans so switching plans should be a deliberate decision made after informed consideration of your options.

Before deciding to change your repayment plan, be certain you have considered the pros and cons of changing plans and are confident that you understand any trade-offs of switching.

For example, switching repayment plans causes unpaid accrued interest to be added to the principal balance of the loan. Once interest is capitalized, it becomes principal and will itself generate additional interest. Capitalization upon switching repayment plans cannot be avoided.

Some borrowers will benefit from switching plans in spite of interest capitalization, but no one should decide to switch plans without first considering the consequences of capitalization.

2. Discuss how the client will document income and how the loan servicer will establish income for calculating payments.

Example: Advisor: “Borrowers choosing an Income-Driven Repayment (IDR) Plan must supply documentation of income. If you use the Electronic Application, you must also use the IRS Data Retrieval Tool. The IRS Data Retrieval Tool will import your Adjusted Gross Income (AGI) figure from your most recently filed federal tax return.

If the AGI from your most recent tax return is higher than your current income, you may be better off using a paper application instead so that you can submit alternative documentation of income.”

3. Caution the client about the importance of ON-TIME annual recertification of income.

Example: Advisor: “IDR plans require annual recertification of income and family size. It is important to be on time—late recertification triggers capitalization of unpaid interest.”

Inform married borrowers that spouses must cosign one another’s IDR applications even if the payments will be based on separate income.

Example: Advisor: “If you use the Electronic Application, each of you will need to login separately to”

[1] Establishing eligibility for repayment plans is a multi-step process involving loan type, total indebtedness, disbursement dates, date loan entered repayment, debt-to-income ratio and other things that are beyond the scope of this guide.

[2] You can get a sense of outcomes using free online tools such as the VIN loan simulator: Run projections for each repayment option and compare costs (you’ll find this is driven by the borrower’s expected debt-to-income ratio over time, interest rates, marital status and marital debt-to-income, whether PSLF is part of the picture, etc.)

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Heather Jarvis, JD

Written by Heather Jarvis, JD

Heather Jarvis is an attorney and a nationally recognized expert specializing in student loan law.  She has provided award-winning student loan education and consultation for universities, associations and professional advisors and is sought after for her sophisticated knowledge and accessible teaching style. Widely recognized as an expert source of information, Heather has advised congressional committee members and administrative officials on issues affecting student loan borrowers since 2005.  Heather graduated cum laude from Duke University School of Law in 1998.

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