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People Retiring with Student Loans May Save Money with Income-Based Repayment

Mark Kantrowitz

November 21, 2011

If Social Security retirement benefits are a retired borrower’s only source of income, those benefits will be tax-free. If the retiree has other sources of income, however, a portion of the Social Security retirement benefit payments will be taxable, along with the other sources of taxable income.

If all of the borrower’s income is tax-free, their monthly loan payments under income-based repayment will be zero.

If the borrower has some taxable income, the monthly loan payments may be much lower than under the other repayment options, depending on the amount of income.

The current poverty line for a family size of 1 is $10,890, so 150% of the poverty line for a family size of 1 is $16,335, or $1,361 per month. Since the monthly payment under income-based repayment is set to zero if the calculated monthly loan payment is less than $5, a borrower can have monthly income that is $3 higher, namely $1,364, and still have a monthly loan payment of zero under income-based repayment. Likewise, 150% of the poverty line is $22,065 for a family size of 2, yielding an income threshold of $1,841 per month for a monthly loan payment of zero under income-based repayment.

There is an important caveat: Income-based repayment is available only for federal student loans. Parent PLUS loans and private student loans are not eligible.

Income-based repayment usually yields a lower monthly loan payment than strategic default. If a retired borrower defaults on his or her federal education loans, the federal government can offset up to 15% of the borrower’s Social Security benefit payments. That’s $354.90 a month for someone receiving the current maximum monthly Social Security retirement benefit of $2,366 and $176.55 a month for someone receiving the current average monthly Social Security retirement benefit of $1,177. But unless the retiree has significant sources of taxable income (i.e., in excess of $30,000 per year), income-based repayment will yield a lower monthly loan payment.


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