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Student Loans

Get a Break on Student-Loan Payments

A new plan bases repayments on income and can rescue borrowers buried in debt.

You have a mountain of student debt and a job you love in a low-paying field. Lately, you've considered ditching that job for a higher-paying gig just to get out from under.

Hang tight. As of July 2009, a new repayment plan for federal student loans, called income-based repayment, rescues borrowers buried in debt by slashing or even waiving monthly payments and forgiving any remaining debt after 25 years. "This is a big deal," says Edie Irons, of the Project on Student Debt, an advocacy group. "It's going to help a lot of people."

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You probably qualify for the plan if your federal student-loan debt equals or exceeds your annual income. The new program caps monthly payments at 15% of the difference between adjusted gross income and 150% of the federal poverty level for your family size ($10,830 for singles in 2009). If you make less than 150% of the poverty level, you pay nothing at all.

Also, to qualify for the program, your new monthly payments must be lower than the amount you would pay under a standard ten-year repayment plan for federal loans. You can compare the two by using the calculators at IBRinfo and FinAid.

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The 25-year plan

Say you are single, have $30,000 in Stafford loans with a 6.8% interest rate and make $20,000 this year. Under the standard repayment plan for Staffords, you would pay about $345 a month. In the income-based repayment plan, you would pay a much more manageable $50. Payments adjust annually according to income but never exceed the monthly amount you would pay in the standard plan. Whatever debt remains after 25 years disappears.

If your payments are too low to cover the interest, Uncle Sam picks it up for you for up to three years on subsidized Staffords (awarded to students with need). After three years, and on other loans, the interest builds but does not compound. Because the debt goes away at the 25-year mark, you don't have to worry that the accrued interest will extend your repayments into your old age.

Income-based repayment improves on but does not replace a couple of other income-related repayment plans, the most comparable of which is the income-contingent plan, for loans offered through the Federal Direct Loan program. You can see about switching to the new repayment plan by contacting your lender. (For a rundown of all the repayment options for federal student loans, see How to Repay Student Loans.)

A quicker way to delete debt

You may not have to wait 25 years for loan forgiveness. Thanks to the same legislation that created income-based repayment, anyone who works for a government agency, a nonprofit organization or AmeriCorps can qualify for forgiveness after making 120 payments over ten years. Only payments made after October 2007 count toward the ten-year time frame.

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To get in on this deal, you must be in the standard, income-based or income-contingent program and have received your loans through the Direct Loan program. If you received your loans through a private lender participating in the Federal Family Education Loan (FFEL) program, as most borrowers do, you can switch to the federal program by consolidating your loans. To find out more, go to Federal Direct Consolidation Loans Web site.