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Grads to Get a Break on Student Loan Payments

Featured Author:

Mark Kantrowitz

As a nationally recognized financial aid expert and publisher of Fastweb.com and FinAid.org, Mark has been called to testify before Congress about student aid on several occasions.

He has served as a guest columnist for the New York Times and the Huffington Post and has been interviewed regularly by major news outlets, including the Wall Street Journal, USA Today, MSN, CNN, NBC, ABC, CBS, CNBC and more.

Mark is the author of five books, including three about student aid. His most recent book, Secrets to Winning a Scholarship, helps families find and win scholarships. He is also on the editorial board of the Council on Law in Higher Education and the editorial board of the Journal of Student Financial Aid, a member of the board of directors of the National Scholarship Providers Association and a member of the board of trustees of the Center for Excellence in Education.

Mark is ABD on a PhD in computer science from Carnegie Mellon University (CMU) and holds Bachelor of Science degrees in mathematics and philosophy from MIT and a Master of Science degree in computer science from CMU.

Follow him on Twitter at @mkant.

More articles from this author:

• Consumer Bankruptcy Attorneys Call for Return of Bankruptcy Discharge for Student Loans
• Summary of President Obama's Budget Blueprint for Federal Student Aid
• President Obama Proposes Student Aid Increases in State of the Union Address

If you’re struggling to make your monthly student loan payments on your measly first-job salary, you’re not alone. The good news is, the government is taking notice — and changing the game to make sure monthly payments don’t cripple college grads.

Even better, whatever you haven’t paid off after 25 years may be forgiven.

With this new option, instead of calculating monthly payments on the total amount a borrower owes, payments will be based on a percentage of the graduate’s discretionary income. It’s called Income-Based Repayment (IBR), it’s available for federally-guaranteed student loans and direct student loans, and it starts July 1, 2009.

If you’re looking for the lowest monthly payment for low and moderate-income borrowers, you’ve found it.

Payments Based on Income, Not Debt

Income-based repayment is similar to “income-contingent repayment” (ICR), but with some key differences.

• First and foremost, IBR is available to more grads. Income-contingent repayment is only available to borrowers in the direct loan program, while income-based repayment is available in both the federally-guaranteed student loan program and the direct loan program.
• IBR uses a smaller percentage of discretionary income and a smaller definition of discretionary income — that means they’re taking a smaller chunk out of the cash you have left over after your other bills are paid. In fact, IBR payments will be as much as 30% to 50% lower than ICR payments.
• Borrowers do not have to consolidate their loans to get access to this plan.

With IBR, you won’t have to shell out any more than 15% of your discretionary income in loan payments.*

For example, if a borrower owed $40,000 in federal education loans and made $30,000 a year, they’d wind up making the following monthly payments under the different repayment plans:

• $171.94 a month with an IBR plan
• $277.63 a month under an extended 25-year repayment plan
• $319.50 a month under income-contingent repayment
• $460.32 a month under standard 10-year repayment plan

Under IBR plans, monthly payments are adjusted annually, based on the prior year’s federal income tax returns and any change in the family size. Borrowers can also request mid-year adjustments due to changes in financial circumstances, such as job loss. A borrower who is married to a spouse with high income can file as married filing separate in order to have the monthly payments based on only the borrower’s income instead of the combined income.

*Discretionary income is defined as the difference between adjusted gross income (AGI) and 150% of the poverty line for the family size. The example above is based on a single borrower who has $40,000 in federal education loans and an AGI of $30,000 a year, taking into account that the 2009 poverty line in the continental US is $10,830 (plus $3,740 for each additional family member), and 150% of that is $16,245.