By Jon Cook
If you're having trouble paying back federal student loans, you may be eligible for income-based repayment (IBR). IBR bases your repayment on your family size and income, thereby decreasing your monthly payment, and, if you follow the rules, forgiving your outstanding balance early.
According to the White House, millions of people are likely not taking advantage of IBR even though they qualify. That said, be sure to read the fine print because not everyone is eligible for the programs.
"If you are eligible, a great benefit of the IBR programs is they may allow you to take your life and career in a direction that may not be the most lucrative, but you find fulfilling, without being burdened by astronomical loan payments," says Jim Heitman, founder of Compass Financial Planning, Alta Loma, Calif.
Borrowers who are employed full time in public service jobs while enrolled in IBR can have their loan balances forgiven. In the past, private financial institutions or specialty lenders like Sallie Mae made federal student loans. Since the Health Care and Education Reconciliation Act of 2010, the federal government took over student lending through the Direct Loan Program (DLP). Your eligibility can be limited by the types of loans you have, so keep this in mind.
First, let's get up to speed on what's out there now and what's coming for IBR plans.
The current IBR program started in July 2009, and all people with federal student loans and a low enough income qualify for this payment option. This plan stipulates that no one can be expected to pay more than 15% of disposable income each month for federal student loan payments. In addition, the program stipulates that if people make their payments for 25 years, any remaining debt will be forgiven.
Disposable income is calculated by taking your adjusted gross income (AGI) and subtracting 150% of the poverty level for your family size. You can be expected to pay only 15% of the money that remains.
The new plan, called "Pay as You Earn," is more generous and caps payments at 10% of disposable income and forgives loans at 20 years of repayment. This will come as welcome news to the 1.6 million people who will qualify immediately for the repayment option.
Full "Pay As You Earn" eligibility details are not final and will not be known until the proposal goes through the rulemaking process. One settled stipulation: To qualify for "Pay As You Earn," you must have one loan from 2008 or later (such as Sallie Mae's Federal Family Education Loan, or FFEL) and one loan originated during or after 2012 (such as a loan obtained through the DLP), as well as being below the income threshold.
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The initial IBR plan offer was supposed to change to the "Pay as You Earn" specifications in 2014, but President Obama signed an executive order moving the offer up to later 2012 for select borrowers. Those who qualify for IBR but not "Pay as You Earn" will be able to get the same benefits starting July 1, 2014.
Let's look at an example of how these programs help folks pay off their debt.
According to a White House fact sheet about "Pay As You Earn," "a nurse... is earning $45,000 and has $60,000 in federal student loans. Under the standard repayment plan, this borrower's monthly repayment amount is $690. The currently available IBR plan would reduce this borrower's payment by $332, to $358. President Obama's improved Pay As You Earn plan will reduce her payment by an additional $119 to a more manageable $239—a total reduction of $451 a month."
public service benefit
If you work in public service, including 501(c)(3) nonprofit organizations, you may also be eligible for the 10-year Public Service Loan Forgiveness Program.
Eligible borrowers who are employed full-time in public service jobs while enrolled in IBR (or certain other repayment plans) can have their loan balances forgiven by making 120 consecutive on-time payments.
One catch: Only DLP (not FFEL) loans qualify. If you have FFEL loans, you may be eligible to consolidate them into the DLP.
You also can save money by consolidating your loans, or combining multiple loans into a single loan with one interest rate and one payment.
You don't necessarily have to consolidate your federal student loans to enroll in an IBR plan, as you typically can apply to the program through all of your lenders.
"If you become enrolled in an IBR program, a portion of your maximum payment will go to each loan and lender depending on amount owed on each loan," says Kenneth Price, chief compliance officer at Austin Asset Management Company, Austin, Texas.
Keep an eye out for correspondence from your lender(s); they will contact immediately eligible individuals, according to the Education Department.
Those who default on their loans cannot qualify for these repayment options. You must be nine months behind on payments to default on a federal loan.
Keep an eye out for info from your lenders; they will contact immediately eligible individuals. "The worst thing you can do when you are falling behind is bury your head in the sand," says Lauren Asher, president of the Institute for College Access and Success, Oakland, Calif. "Be sure to communicate with your lenders."
According to Asher, the federal government created these programs because it's hard to get a degree without going into debt. There was a need to decrease the risk associated with going into debt, especially if you don't make a large amount of money.
"Getting a college degree is one of the best investments you can make, but the payoff isn't certain, and IBR programs can help weather hard times," says Asher.