Assistance with student loans from the income based repayment program.

The new federal government student loan assistance program, called income-based repayment, puts a maximum amount that someone can owe and also limits the monthly loan payments to a fixed percentage of the borrower's monthly household income. The program is complicated and not every borrower can get help from it. However, you should look into this as a possible solution. In general, it will help those who have federal student loan balances that exceed their annual income. People in this situation will almost certainly qualify for assistance. In most cases, your student loan payments could be reduced by about 50 percent.

What is the income-based repayment plan?

If you have federal student loans and you are having a hard time repaying them, then you should strongly consider an income-driven repayment plan. IDR plans cap your monthly payments at 10 or 15 percent of your discretionary income, depending on which plan you select. Discretionary income is determined by the amount of money you make above 150 percent of the federal poverty level. Therefore, if you earn less than 150 percent of the poverty level, then your monthly payments will be $0.

Your student loans will still accrue interest, however, after 20 or 25 years (depending on the plan you select), any remaining debt that you owe will be forgiven. There are multiple income based repayment plans available. Here are the IDR plans available:

  • Income Based Repayment (IBR)
  • Pay As You Earn (PAYE)
  • •Revised Pay As You Earn (REPAYE)

For the IBR and PAYE plans, you must demonstrate a financial hardship. However, the REPAYE plan is available to anyone who would benefit from it. You can learn more about each of these plans by visiting the Federal Student Aid website.

This program is different from most other options in that there are a wide variety of assistance programs that exist and they will usually provide consumers a set period of time to to repay the outstanding balance of their loans, say 15 years. Compare that to the income-based repayment option, which doesn't set your monthly payments based upon on a set payoff date.





What will happen is that the monthly payments you need to make will be based on the borrower's income. The amount of your monthly payment is determined by how much your income exceeds federal standards. There are guidelines that consider the applicant’s family size and location of residence. What is comes down to is the less you earn in income, the less you will need to pay for your student loans.

How much do I need to pay each month?

The key factor is your income, your total debt, the number of people in your household, and where you live. There are some basic guidelines for people on the very low end. For example, the Education Department says that if you are single and earn only $20,000 per year, the most you'd need to pay is $47 per month. If you earn $25,000 per year, the required monthly payment would be $109. If you earn up to $35,000, the required payment on your student loans will be maxed out at $234.

Compare that to what could happen right now. Say you had $50,000 in student debt and are paying a 6.8% interest rate. Your current payment would be $575.40 per month under the standard repayment plan, regardless of your income. So as you can see the income-based repayment program can provide borrowers a significant amount of relief.

If I pay less every month on my student loans, do I need to pay for more years and therefore end up paying more in total interest?

This is the case, and the answer is yes. Currently, interest accrues on student loan balances each and every month, and if as a result of this program you are paying less than the monthly interest that's accruing on your debt, the total balance of your loan could actually rise. However, this program is meant to help those who need the relief, and for that reason it is strongly advised that anyone who could afford to pay more on their loans should. So even if your payment is reduced, you still can pay more every month in order to pay down the principal on your loan.





Does the income-based repayment plan mean I'll be paying on my student loans “forever”?

Definitely not. There is a condition to the plan that says that any borrower who has faithfully made payments for a period of time of 25 years can have his or her remaining student loan balance eliminated after those 25 years. So, worst case, the longest you will ever need to pay is 25 years.

Another not very well know assistance program is that if you work for a nonprofit or government and continue to pay your debts under the direct loan program for 10 years, then another federal program called Public Service Debt Forgiveness could be an option for you. This may eliminate the balance off your student loan after that 10 year period of time.

How do I know if I qualify and how much will my payments be?

The Federal Government Education Department provides users a Web-based calculator on its site that explains the repayment options for this and other assistance programs. They can also tell you what your monthly payments may be.

This program offers a great financial aid package to those who qualify. In some cases, there may be no monthly payments required on order to pay your student loan costs for those who earn less than a certain income, which is currently about $16,000 a year. If your income is above that threshold, even then your monthly payments will be generally capped at 15 percent of any income above that amount. In addition, any outstanding debt that is remaining after 25 years is written off. Unless of course you start making enough money and your income is so high that you no longer qualify for the student loan assistance program.

If my income is too high will I be be locked out of the program?

Not necessarily. Remember, the formula used to determine whether you qualify for income-based repayment looks at your monthly student loan payments versus your discretionary income. So, you can still get financial aid even if you have a high income. This is possible as the individuals could have a substantial income and still qualify for assistance if you also have a lot of outstanding debt or if you live in expensive part of the country.

Are all student loans eligible?

Most, but not all. The federal program is only available for federal student loans that were originated under the Stafford, Grad Plus and any other federal student loan consolidation loan programs. Some other criteria include it does not apply to parent's loans that are taken out for students, which are called Plus Loans. Also, it only applies to Perkins Loans if they're consolidated into the Direct Loan or Federal Family Education Loan programs. In addition, this new federal government program does not apply to state or private loans and it does not help with any other loans or debts that are not backed by the federal government.





How do I apply for the income-based repayment program?

Assemble documentation, including your current loan information that needs to show all of the details on your account. It needs to show the exact type and amount of your loans, balances, type of lenders, interest rates, and provide detail on all of the payment terms. Then contact your lenders and ask them about this program.

By Jon McNamara

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