I’ve heard from several people that they’ve had difficulty with loan servicers incorrectly recalculating their monthly IBR payment. This is especially true when the servicer is provided with alternative documentation of income instead of a tax return (where AGI is clearly noted). I now have personally experienced this problem.

Because of overtime, which I took advantage of last year, my AGI was higher than it normally would be. Therefore, when I received my renewal notice, I sent my current servicer a month of pay stubs as well as a letter clearly laying out my regular gross pay, my pre-tax deductions (even marking them on the pay stubs) and my total regular income after those deductions. I even provided them with what I felt the new payment would be, based on the online IBR calculator (I calculated it to be about $40 more than last year’s payment). To my shock, I received my new payment amount and it’s almost half of what it was before!  Because I will also be eligible for PSLF, I immediately called to question the accuracy of my payment, as I don’t want an incorrect calculation to create ineligible payments. To my shock (again), I was told that the payment was based on an income amount much, much lower than the income information I provided to them in my letter. The customer service rep then stated that it looked like they used my net paycheck amounts to determine yearly income and hence, my new payment. She then stated that she was not sure why they used net instead of gross income in doing so.

She then said that when someone provides pay stubs instead of a tax return, they are not allowed to “assume deductions.” So, even though my paycheck states that certain deductions are pre-tax, those cannot be considered in determining my yearly income. Instead, only the gross amount can be used.  She also stated that the employer could provide a statement of my AGI (though most won’t), but providing a list of pre-tax deductions is not sufficient. This does not make any sense, but it gets even better!

The customer service rep then said she wanted to verify that information and put me on hold. When she returned, she said she was incorrect and that someone just told her that when new IBR payments are calculated using pay stubs, they are “supposed” to use the net amount. She then assured me that my much lowered payments (to start next month) would count as qualifying payments under IBR. This was the case, she said, because I would be paying what they billed me, based on their calculation of what I owed.

While I’m not complaining that my payment is lower than I have been paying, I know this information is quite inaccurate! I KNOW that payments are not supposed to be calculated on my income after tax, let alone after direct deposit deductions into my savings account, among other post tax deductions. That means I could dramatically increase the amount automatically deposited into my savings account, have a net paycheck of $5, turn that in as alternative documentation of income and have a $0 monthly payment!

I now have a dilemma. I want to send in a PSLF application so I can have my currently four years worth of qualifying payments documented in the system. However, I know that when I do (I verified with the customer service rep I spoke to), my loan will get transferred to a different service provider (I think it’s Fed Loan Servicing).  When that happens, as happened with a friend, the loan servicer will ask for income verification to recalculate my payment amount for their system. This would not be problematic, except that I know this particular service provider (based on a friend’s experience), when given pay stubs as income verification, uses the GROSS amount of pay to determine annual income and refuses to take into account any pre-tax deductions shown on the paycheck (even ones specifically labeled as pre-tax). Interestingly, this is the info I was initially given by my current servicer. So, if I transfer my loan, I face a payment recalculation significantly higher than it should be. 

Hence, my dilemma:  Keep the payment that I know is lower than I should be paying (because I’m truly not attempting to game the system), or get stuck with a payment that I know to be too high and will cause added burden to my budget.

I’m not really asking anyone to solve my dilemma, but I will say that in either case, my payment would not be correctly calculated.  I’d heard that this had been a prevalent problem, but I had never actually experienced it myself. So, my questions:  How do we ensure accuracy of our payments calculations?  If I fill out PSLF paperwork and my loan is transferred, is there any way I can make them take into account my pre-tax deductions?  Isn’t that required by law?  How is it possible that service providers are continually getting this wrong? In the case of my current servicer, very, very wrong, and to the government’s detriment.

One other concern from this whole experience. When I received my new payment amount from my current servicer, the letter included a description of the various payment plans.  Here is what it said about IBR:

Income-Based Repayment. You are required to verify your current income and to renew this payment plan annually. Your monthly payment will be based on your income during any period when you are experiencing a partial financial hardship, which must be re-applied for annually. You may be eligible for loan forgiveness after 25 years of qualifying payments.

I agree that the plan has to be renewed annually, but it is my understanding that once in IBR, you are not kicked out. Therefore, you do not have to reapply and if your income increases to a point where you no longer have a partial financial hardship, you are not kicked out of the plan. Instead, your payment will continue to increase until it is capped at the 10 year repayment amount. Is this accurate?

Thank you so much for this forum.  It is a gold mine of information!