New Government Program Pegs Federal Student Loan Repayments To Income

by Persia Walker

Wednesday, July 1, 2009, will be remembered as an important date for in the battle for student loan debt reform and student debt help. That's the day on which the government's new Income-Based Repayment Plan (IBR) became available.

Under IBR, you might be able to substantially lower your monthly student loan repayments you might even be able to cut them out entirely!

IBR covers direct federal loans and federally-guaranteed student loans made through private lenders. It does not matter, whether the loan is old or new, whether it was used for undergraduate, graduate, or job-retraining studies.

Under IBR, you could see your monthly payments capped at rates realistically adjusted downward for your income. Remaining balances would be forgiven after 25 years. Better still, those who go into relatively low-earning fields, such as public service, could enjoy student loan debt forgiveness after only 10 years.

Your income, loan size and family size help determine your monthly payments under IBR. It's your lender who makes the decision, but you can get an idea of what's what at www.ibrinfo.org, where you'll find an IBR calculator.

For low-wage earners, IBR could really be a boon. People who earn $16,000 a year, for example, (or 150 percent of the poverty level) won't have to pay more than 15 percent of their income. People who earn less won't have to make any monthly payments at all.

But not everyone eligible will enjoy all benefits under the program.

Most people, for example, probably will have paid off their loans within 25 years, and so the loan forgiveness aspect won't apply to them.

There is incentive to pay off the loan, too, since the accruing interest could increase the cost of the loan. The faster you pay off the loan, the less expensive it is.

The government's Income-Contingent Repayment Plan is similar to IBR, but it's less generous. It only applies to direct federal loans. It caps payments at 20 percent of income that surpass 100 percent of the poverty level. If you're in the income contingent plan, you can apply to switch over to IBR.

Unfortunately, IBR cannot be applied to Parent PLUS loans, the federal loans parents take out to help pay for their children's studies.