Client tells us about new program to reduce student loan debt
We have a wide variety of clients on our Courtesy Shuttle, leading to conversations on a wide variety of subjects. If you are one of the many people with high student loans then you’d probably be interested in one of Jeff’s recent talks with a client who told him about Income Based Repayment (IBR) and Public Service Loan Forgiveness (PSLF), programs that can radically drop the amount that you eventually repay.
Income-based repayment is not the same as income-contingent repayment, but they are similar. Both cap the monthly payments at a percentage of discretionary income, but they use different percentages and different definitions of discretionary income. Income-based repayment is available for both the Direct Loan program and the federally-guaranteed student loan program, without doing loan consolidation. It caps monthly payments at 15% of monthly discretionary income (the difference between adjusted gross income and 150% of the federal poverty line that corresponds to your family size and your home state.) There is no minimum monthly payment.
As an example, consider a single person earning $30,000 a year with $40,000 in federal student loans. Using the 2009 poverty line of $10,830, the monthly payment cap under IBR would be $171.94 a month. This compares with $319.50 under income-contingent repayment $277.63 under extended 25-year repayment and $460.32 a month under standard 10-year repayment.
The maximum repayment period is 25 years. After that, any remaining debt will be forgiven. Under current law, the amount of money written off is treated as taxable income, so you’ll have to pay income tax on it 25 years from now. But can be well worth it for students who want to go into public service where low wages might not cover student loans.
Public Service Loan Forgiveness forgives debt after 10 years of eligible employment and qualifying loan payments. During the 10 years, it can be combined with IBR to keep the loan payments affordable.
Of course it’s much more complicated than we can outline in four paragraphs, and there are downsides and qualifications. Here are several websites that can give you the information you need to see if IBR or PSLF is right for you.
IBR Info- “An independent, nonprofit source of information about new federal student loan payment and forgiveness programs”, includes snappy video outlining the program.
IBR and PSLF- Gives a brief outline of both programs and how they work together
IBR Calculator– Let’s you see what your payments and payoffs would be under IBR
StudentAid.ed.gov- Describes IBR and other Federal loan programs.
FinAid- A non-governmental website, this gives you several examples of IBR and some things to watch out for.
“How IBR will make you poorer”, Zac Bissonnette, AOL Daily Finance. He points to an example that shows that in order to reduce your monthly payments by 40%, you could increase the number of payments you make by 150%. Definitely a downside.
