By Jason Alderman
For many professions, the price of admission is higher education. Unfortunately, college degree costs have skyrocketed, so people often to enter the workforce saddled with massive student loans and monthly loan payments that strain their starting salaries.
In response, the Obama Administration recently launched a new, more lenient repayment program called income-based repayment (IBR) for many types of federally guaranteed student loans. IBR may be especially beneficial for low-income people, the unemployed and those who work at low-paying, “public service” jobs in education, the government or non-profit organizations.
Under IBR, required monthly payments are capped at an affordable level relative to your adjusted gross income, family size and state of residence. For example, if you earn less than 150 percent of the government’s poverty level for your family size, you would pay zero. As your income increases, so will your monthly payment – up to no more than 15 percent of income that exceeds that same 150 percent of poverty level.
One of IBR’s best selling features is that the government will forgive any debt still owed after 25 years of consistent repayment. Those qualifying under the public service definition must only repay their loans for 10 years before the balance will be discharged.
A few other IBR features:
• Only certain government-guaranteed loans such as Stafford and Grad PLUS loans qualify; private loans, Parent PLUS and consolidated loans containing Parent PLUS loans do not.
• Qualifying loans can be new or old and for any type of education.
• IBR payments are adjusted annually to reflect changes in income and family size.
• You must submit updated income documentation to your lender each year. If your income rises, so will your payment amount, although never above what you would otherwise pay under a standard 10-year repayment schedule.
• There is no qualifying income ceiling, although higher-income people would need extremely high outstanding loan balances to qualify for IBR.
If, after you’ve begun repaying your student loans, your income is too low to meet payments, contact your lender, which can determine whether the loan qualifies for IBR.
IBRs do have several potential downsides:
• Loans in default are not eligible.
• Because IBR will likely extend the term of your loan, you’ll probably accrue more interest than under a standard 10-year payoff.
• The amount of debt discharged after 25 years will be subject to income tax at that time, unless Congress changes the current law. (Although, if you are eligible for the 10-year public service program, your debt will be discharged tax-free after you’ve made 120 monthly payments).
If you expect your financial hardship to be temporary, other loan repayment options, such as economic hardship deferment, forbearance and extended repayment, may be better options. For details on these options, go to www.finaid.org and search “Trouble Repaying Debt.” FinAid also features a calculator to compare IBR with standard and extended repayment options under a variety of income scenarios (click “Calculators”).
For eligibility details and other helpful information, you can also visit the U.S. Department of Education (go to http://studentaid.ed.gov and search “IBR”) and the Project on Student Debt (www.ibrinfo.org).
Jason Alderman directs Visas financial education programs. Sign up for his free monthly e-Newsletter at www.practicalmoneyskills.com/newsletter.
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