To Link or Not to Link: Guide to IRS Automatic Income Sharing for Student Loans Repayments

One way to quickly and easily recertify your income for student loan repayment is through the Data Retrieval Tool (DRT) from the Internal Revenue Service (IRS).

The tool pulls the income you’ve reported to the IRS on your tax returns and shares it with the Department of Education. This shared data helps you calculate your monthly payment under various federal student loan repayment plans.

It can be a convenient option, but there might be some pitfalls involved. Before you use the DRT for student loan debt, carefully consider whether it makes sense for your situation. Here’s what you need to know.

What is IRS automatic income sharing for student loans?

The IRS Data Retrieval Tool was put into place by Congress with the passage of the FUTURE Act. It’s designed to connect your federal tax return to your education loan information. The DRT is particularly relevant for borrowers who are filling out the Free Application for Federal Student Aid or who are enrolling in, or recertifying, an income-driven repayment plan. 

For example, borrowers who are on an IDR plan must recertify their eligibility annually. During this process, you must provide an update of your income, family size and employment information. This information is used to verify eligibility and determine the discretionary income that’s used for your monthly payment calculation.

The IRS DRT lets you pull your adjusted gross income (AGI) data from your income tax return, automatically. Using the IRS tool to share your income data with your loan servicer can be convenient when filling out the recertification form, and for recalculating your student loan payments.

Benefits of using the DRT

When using the DRT, student loan borrowers can easily update their payments based on taxpayer information from the IRS. Some of the benefits include:

• Streamlined income verification process. Rather than going through the trouble of verifying your income each year and waiting for the servicer to approve your information, it goes straight to the Department of Education. It’s a streamlined process that requires less effort.
• Reduced paperwork and manual updates. You don’t need to fill out paperwork when you connect to the DRT. You also have fewer manual updates to make when recertifying for an income-based repayment plan.
• Potential for faster loan repayment calculations. Depending on your loan program, you can potentially get a faster monthly payment amount calculation with automatic income sharing. It’s a way to learn what you’ll pay faster and prepare for your new payments.

DRT’s Potential pitfalls and misconceptions

When sharing your tax information via the IRS DRT, continue to fact-check the auto-populated information. Don’t assume that you won't need to communicate with your student debt servicer again. Stay on top of your federal loan repayment by reviewing your information regularly at StudentAid.gov.

Borrowers might be misled into early recertification

One concern with using the IRS’ DRT is that it might mislead you into recertifying your information sooner than necessary. If you earn a higher income mid-year, for instance, you’re not required to recertify your new income until the next recertification deadline. Using the tool might cause you to submit your recertification early, which could result in a higher monthly payment sooner.

It might also not take into account your new total amount owed, or it might certify you for a different plan than you’re interested in. If you’re looking to switch to a different plan, such as the new SAVE plan, you might want to hold off on recertifying while you determine whether you’re eligible for a different plan or even for student loan forgiveness.

Related: 5 Myths About the New SAVE Plan, Demystified

The effect of incorrect payment calculations

No tool is perfect. There’s a chance that incorrect payment calculations might slip, though, based on your reported taxable income.

This is especially possible when you have alternative income sources. For example, if you live in a community property state, your spouse’s income might be included on your tax return, increasing your income. 

This would mean a higher monthly payment — or could even end your eligibility for a program. You might want to opt out of using the DRT so you can use other income documentation instead of your tax return.

You might also want to consider filing separately, depending on the IDR plan you’re considering.

Concerns about data privacy and security 

Finally, you might be concerned about your loss of control over sharing your data between agencies and your ability to revoke access. 

The good news is that StudentAid.gov lets you easily revoke the tool’s access to your IRS data. Log in to your account, and go to “Settings”. Under “Financial Information,” select the “Revoke Consent” button, and type your name into the dialogue box to complete the process.

Who should consider linking their tax data?

Those interested in getting on an income-driven plan, including those with Direct Loans, might consider linking their data for fast calculations and recertification in the future. If you’re not interested in remembering to fill out the paperwork each year, it can make sense to link your data. 

However, it’s still a good idea to log into your StudentAid.gov account to check your loan balance and make sure your payments are on track.

If you’re not confident about how accurately your tax return data will translate into your student loan payment calculation, hold off on using the DRT. 

For example, it’s unclear whether the IRS will provide family size information. If you have a large family, that affects your monthly payment. However, if that’s not reflected in the information sent to the U.S. Department of Education, it could affect your enrollment in an IDR plan.

Tools and strategies for borrowers

If you’re deciding between the various IDR plans, like income-based repayment (IBR), pay as you earn (PAYE) or even Biden’s new Saving on a Valuable Education (SAVE) plan, use available tools and resources to determine your next move. 

Use a repayment calculator

Before linking data, use our student loan calculator to understand what your accurate payments look like. It gives you an idea of what to expect based on the repayment plan you might qualify for. Then, decide whether proceeding with the IDR application process makes sense for you.

Decide whether to link your data

Next, consider whether you want to link your data to the IRS tool. It can streamline the process but might provide information that negatively affects your application and payments. Consider your family size, and different types of income, including how they’re reported. 

Consider temporary forbearance

If you’re struggling to make your monthly payments, another alternative approach is applying for temporary forbearance. This option lets you temporarily pause payments, so you have financial breathing room. 

Be aware that interest charges might accrue during this time despite payments not being required. 

Making sense of IRS data sharing for student loans

Be informed and proactive in managing your student loans. Weigh the pros and cons of automatic income sharing, especially regarding as it relates to IDR plan eligibility. 

If you’re still unsure whether using the IRS’ DRT can be useful in your repayment strategy, there’s help. Our student loan experts evaluate your unique student loan situation and offer guidance on a repayment strategy that works for you. Schedule a consultation today.