Testimonial from a friend today… “This program is awesome! I heard about it last week. It’s going to save my butt when I finish school!”
Starting July 1, many people having trouble repaying their federally guaranteed student loans might be able to choose a new, more lenient payment plan.
The program, called income-based repayment, will be available to more people and almost always result in smaller monthly payments than an existing program for stressed borrowers called income-contingent repayment. The new program sets monthly payments based on adjusted gross income and family size. Unpaid principal and interest is generally added to your loan amount. Any debt remaining is wiped out after 25 years – or after 10 years if you work in the public or nonprofit sector.
If you are unemployed, low-income or have a very large debt, you could qualify. “People who need advanced degrees to get low-paying jobs” are prime candidates, says Edie Irons, a spokeswoman for the Project on Student Debt.
There is no income limit. Even people making $100,000 could qualify if they owe more than they earn in a year.
The payment cap works like this: If you earn less than 150 percent of the poverty level for your family size, your payment will be zero. If you earn more, your monthly loan payment will be capped at 15 percent of your annual income that exceeds 150 percent of the poverty level, divided by 12.
For example, a single person earning less than $16,245 a year – that’s 150 percent of the poverty level – would pay nothing, no matter how big the debt. (The poverty level is slightly higher in Alaska and Hawaii.)
A single person who earns $30,000 a year would pay no more than about $172 per month.
If your payment under this formula is less than what you pay under a standard 10-year repayment schedule, you will qualify for income-based repayment, assuming your loans qualify.
The new payment plan is available on Stafford student loans (subsidized and unsubsidized) and Grad PLUS loans. These government-guaranteed loans are issued by the Department of Education under its direct lending program and by banks and other lenders such as Sallie Mae under the Federal Family Education Loan program. Consolidated Stafford and Grad Plus loans also qualify, as long as they were not combined with Parent PLUS loans. Loans in default do not qualify.
The new plan is not available for Parent PLUS loans or private loans, which are also issued by banks and other lenders.
To see if your loan qualifies, check with your lender.
If your payment is reduced, any unpaid principal and interest is added to your loan balance, but the accrued interest does not compound. However, if you have a subsidized Stafford loan, the government will pay unpaid interest for up to three consecutive years.
If you repay under the new plan for 25 years and meet certain other requirements, any remaining debt will be extinguished. “If your payment is zero, that still counts toward loan forgiveness,” Irons says. The forgiven debt will be taxed as income, unless Congress passes a bill that would exempt it.
If you work for 10 years in a public sector or nonprofit job, remaining debt could be wiped out after 10 years. This forgiven debt will not be taxed as income.
Your payment will be adjusted each year to account for changes in your income and family size. If your income rises, your payment will rise, but it will never be more than what you would pay under a standard 10-year repayment schedule.
If your income reaches that point but you would rather not pay under the 10-year schedule, you could switch to a different repayment plan.
The main downside of the new program: “Like any plan where you pay less than the full amount, you could end up paying more interest over time,” Irons says.
Although the Obama administration is trying to simplify student aid, the new program – approved in 2007 – makes loan repayment even more complicated. The options include forbearance; unemployment or economic hardship deferments; and standard, graduated, extended, income-contingent, income-sensitive and income-based repayment.
“It’s hard to know what to do. There are not enough places to go for help,” Irons says.
If you graduated in May or June, you won’t have to begin making payments until November or December.
Public or nonprofit jobs
Although it’s very hard to generalize, Mark Kantrowitz, publisher of Finaid.com, recommends that people in public or nonprofit jobs enter or switch into income-based repayment.
People facing a financial hardship they know will be temporary – such as a maternity leave – should consider an economic hardship deferment. People with a longer-term need should consider extended or income-based repayment, he says.
For more information, see:
– The Project on Student Debt: www.ibrinfo.org
– Department of Education: links.sfgate.com/ZHMB