Remaining Debt May be Forgiven
An added benefit of income-based repayment is that any remaining debt is forgiven after 25 years. Unfortunately, this forgiveness will be taxable under current law. However, the forgiveness period drops to 10 years for borrowers who are employed full-time in public service careers, and that forgiveness is tax-free according to a US Treasury ruling last year. (To be eligible for public service loan forgiveness a borrower must repay her loans in the direct loan program. Borrowers who have loans in the federally-guaranteed student loan program can transfer their loans to the direct loan program by consolidating them at loanconsolidation.ed.gov even if they've previously consolidated their loans.) For example, consider an attorney who accumulated $120,000 in law school debt, but wants to pursue a job as a public defender earning $40,000 a year. That's a debt-to-income ratio of 3 to 1, yielding monthly payments that are 41.4% of gross income under standard 10-year repayment and 23.5% of gross income under extended 30-year repayment. Under income-based repayment the monthly payments would be 8.9% of gross income, much more affordable. (Under income-contingent repayment the monthly payments would be 11.9% of gross income.) After working as a public defender for ten years all the remaining debt would be forgiven, including the original $120,000 loan balance and more than $30,000 in accrued but unpaid interest. This makes it possible for public-spirited students to pursue lifelong careers in public service despite the high debt and low salaries. Generally, a debt-to-income ratio of 1.5 or more will result in forgiveness after 25 years except for borrowers with six figure incomes, and a debt-to-income ratio of 1.0 or more will result in forgiveness after 10 years.
Private and Parent PLUS Loans Not Eligible
Unfortunately, non-federal loans are not eligible for income-based repayment. Income-based repayment is only available for Stafford, Grad PLUS and consolidation loans. It is not available for Parent PLUS loans or for consolidation loans that include Parent PLUS loans. Income-based repayment can be used with Perkins loans, but only if those loans are included in a consolidation loan. (But then one loses the favorable interest benefits associated with the Perkins loan.) It is also not available to students who have defaulted on their loans unless they have rehabilitated those loans.
Improvements in Income-Based Repayment
Congress passed improvements in the income-based repayment plan as part of the Health Care and Education Reconciliation Act of 2010. The improvements cut the monthly payments by one-third to 10% of discretionary income and accelerate the loan forgiveness from 25 years to 20 years. However, these improvements are effective only for new borrowers of student loans on or after July 1, 2014. Existing borrowers will not benefit as the changes are not retroactive.
Additional information about
is available from FinAid.org. FinAid also provides
public service loan forgiveness
and a flexible
income-based repayment calculator
for evaluating monthly payments and loan forgiveness under this
repayment plan. Another source of information is
from the Project on Student Debt.