Get a Break on Student-Loan Payments
A new plan bases repayments on income and can rescue borrowers buried in debt.
By Jane Bennett Clark, Senior Associate Editor, Kiplinger's Personal Finance
June 23, 2009
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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.
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.
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.
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Reader Comments (6)
Posted by: mac wildstar at 06/25/2009 12:11:33 AM
25 years? Wow, ive been waiting for something like this for about 19 years. Now if I start it now, I will be 72 when the 25 year term is up. IF I am alive then...Get real. This is just another govermental leach program designed to allow government to avoid the real issues. Issues like, why student loans are the ONLY financial loans that lack consumer protections afforded to any other kinds of loan. And issues like, why Congress systamaticaly removed those consumer protections, including bankruptcy, over a period of 8 years? And why is government STILL failing to provide proper oversight of the student loan industry and of the outrageous costs of colleges. Only a fool signs up for student loans in today's world. Once you sign up, you are a debt slave, with no way out unless you are one of the lucky ones who does manage to land a good job that pays enough to pay off your loans.
Posted by: MJB at 06/25/2009 10:04:39 AM
It would be helpful if this article included information on application for the plan. It's sort of key to the story.
Posted by: Debtee at 07/02/2009 06:46:28 PM
I was skeptical when I read that there was new relief given to those living under the weight of student loans. None of this affects me. How about placing a temporary moratorium on federal student loan interest until the economy improves and we can all get jobs, or decent pay!? Just give us 2 years - we still pay principal, but interest is deferred (not accruing). That isnt too much to ask. GM got billions in bailouts, and still filed for bankruptcy. Smooth move washington. Recent grads in debt, who cant find decent jobs (or any job) could have used that $$$ to greater effect.
Posted by: Lori at 07/05/2009 02:00:15 PM
I keep reading about loan forgiveness after 10 yrs for teachers. Where are we supposed to go to get this information?? Shouldn't that be included in the article?
Posted by: tina c at 07/27/2009 01:38:29 AM
They neglect to mention that while you no longer accrue any more interest on this debt after 25 years that it doesn't just go *poof* and disappear. The remainding balance on the loan is essentially declared forgiven but you are taxed on that as "income" on your taxes. (To the best of my knowledge as to how i read it in a few other FAQS from the actual Federal Student Loan site)
Posted by: bd at 11/02/2009 04:33:44 PM
This is moderatley helpful - but what about those who are above the poverty level? (20k a year..really?). I make 65k, but have 98k in student loans (undergrad and grad, no help from the parents). I am 25, have 2 roommates to lower rent, no credit card debt, and a modest (240) car payment that will be done in 3 months (15 months early). Still, I feel like I'm barely above water. I have a modest savings, and a modest retirement, which I know is more than a lot of 25 year olds can say, but I'd love to hear how I can get above water and out of this honest debt...