Exploiting the New Student-Loan Rules
By MARY PILON
Tuition continues to soar, but there might be some relief for borrowers grappling with student-loan debt: federal income-based repayment programs. Many borrowers may not be aware of them.
Originally designed for those who pursue public-service jobs, the programs have expanded to benefit just about anyone struggling with student-loan debt, especially those with high debt loads and low incomes.
The programs do come with fine print. One major caveat: Only government-backed loans qualify. Loans issued by private companies—which lack many consumer protections—don't.
The current program, rolled out in July 2009, caps the amount of a borrower's discretionary income that goes to repaying a federal loan at 15%. Then, after 25 years, any remaining balance—both principal and interest—is forgiven. If the borrower works in public service, the balance is forgiven after 10 years.
Congress recently passed legislation that expands the program. For federal loans issued after 2014, the cap will be lowered to 10% of income, and the debt is forgiven after 20 years. (For public service, the period remains 10 years.)
The programs are available for graduate students as well as undergraduates, potentially benefiting those in professions known for high debt loads such as medicine and law. PLUS loans—federal loans made to parents—aren't eligible, though many consolidated federal loans are. Federal loans also carry no prepayment penalties.
"We've been pulling our hair out because not enough people know about these programs," says Philip G. Schrag, director of Georgetown Law's Center for Applied Legal Studies, who has written extensively about student loans.
How do you know if you qualify for the programs? If the total amount of student-loan debt you owe is equal to or more than your annual salary—based on your most recent tax return—it's likely that you are eligible. If you have had a dramatic change in income since then, you may also qualify.
The current 15% income cap may end up being even lower because of the program's sliding scale. If your income is under 150% of the poverty line for your family size, you pay nothing each month. If your salary increases, your payments are recalculated.
For example, a single person earning $60,000 a year owing $60,000 pays 10.9% of her income, or $545 a month, toward student loans under the program. A family of four with a household income of $60,000 a year and the same debt pays 6.7%, or $335 a month.
You apply through your lender, though information can be difficult to find, says Lauren Asher, president of the nonprofit Institute for College Access & Success. The group offers a site, IBRinfo.org, with links to applications and calculators.
Deferment or forbearance, which essentially put loans on pause for a year, are other options for borrowers hitting a rough patch. However, interest and fees may accumulate and most lenders limit the number of times borrowers can defer their loans.
Borrowers who have defaulted on federal loans, often those most in trouble, aren't eligible, unless they make good on their defaulted loan by "rehabilitating" it.
For those who pursue public-service jobs, paperwork can be difficult. Essentially, borrowers have to produce documentation to prove that they worked in a qualified public-service job for 10 years to get the rest of their loan forgiven. For young people who travel or change jobs, this could cause a rude awakening in 10 years.
The current income-based repayment program also has a marriage penalty that is scheduled to be repaired partially by July 2010. Currently, joint incomes are counted, but not joint payments toward student loans.