New student loan repayment plan is based on borrower’s income

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New student loan repayment options came just in time for Jeff Zollinger.

Zollinger, 32, of Savannah, Ga., a father of two, just graduated from architecture school with $125,000 in debt. He and his wife, an audiologist, expect to make good money someday — more than enough to pay the loans. But between the rotten economy and a new baby, they have been able to find only part-time work. They’re struggling to make ends meet, so the $1,200 a month that Jeff’s lenders want on his loans doesn’t seem feasible.

Fortunately for the Zollingers, a new federal student loan repayment plan takes effect this month that could dramatically reduce payments for highly indebted borrowers. Income-based repayment limits the monthly payments to a percentage of the borrower’s monthly income.

The program is complex and won’t apply to every borrower. But those who have federal student loan balances that exceed their annual income almost certainly qualify, said Edie Irons, communications director for the Institute for College Access and Success in Berkeley, Calif. In many cases, loan payments could be halved.

What’s income-based repayment?

It’s the newest of six repayment options for federal student loans. Income-based repayment doesn’t base payments on a set payoff date. Instead, the payments are based on the borrower’s discretionary income. That’s calculated by determining by how much the borrower’s income exceeds federal poverty guidelines for family size and location. The less you earn, the less you pay.

If you pay less each month, doesn’t that mean you’ll pay for more years and end up paying more interest, too?

Yes. Interest accrues on student loan balances each month, and if you’re paying less than the interest that’s accruing, the balance of your loan could rise. For that reason, anyone who could afford to pay more would be advised to, Irons said. But if the loan payments are making it impossible to pay other bills, this program gives you the flexibility to help your cash flow without hurting your credit.

Will I be paying off my student loans forever?

No. Under the plan, borrowers who faithfully make payments for 25 years can have their remaining loan balance forgiven or wiped away.

In addition, if you work for the government or nonprofit and repay your debts under the direct loan program for 10 years, you could have your loan balance wiped out faster under another federal program, Public Service Debt Forgiveness.

How much would I have to pay each month?

That depends on your income, your debt and the number of people in your household. However, the Education Department says that if you are single, you would have to pay no more than $47 a month if earning $20,000 a year, $109 a month if earning $25,000 and $234 if earning $35,000.

Under the standard repayment plan, if you had $50,000 in student debt at 6.8 percent, you’d have to pay $575.40 no matter how much you earned.

Will I be locked out of the program if I earn more?

No. The formula determining whether you qualify takes into account your loan payments versus your discretionary income. Payments are adjusted annually for changes in income and family size.

Can I use the program with all my loans?

The program is available only for federal student loans under the Stafford, Grad Plus and federal consolidation loan programs. It does not apply to parents’ loans for students (called Plus Loans) and applies to Perkins Loans only if they’re consolidated into the Federal Family Education Loan or Direct Loan programs. The program also does not apply to private loans, state loans or loans that are not backed by the federal government.

How do I know whether I qualify and how much my payments might be?

The Project on Student Debt has set up a Web site dedicated to answering questions about income-based repayment at www.ibrinfo.org. The site has a calculator that estimates whether you’ll qualify for the program and roughly what your payments will be.

The Education Department also offers a calculator at www.studentaid.ed.gov that explains all repayment options for student borrowers. Scroll down and click on "repaying your loans" on the left side of the page. Then click on "repayment plans and calculators."

How do I apply?

Gather your loan information, showing balances, type of loans and lenders. Then contact your lenders. If your lender will not offer income-based repayment, call the Education Department at 800-4-FED-AID and look into consolidating your qualifying loans into the Direct Loan program, which the federal government administers.
Kathy Kristof writes for the Los Angeles Times.

Jul. 11, 2009
By KATHY KRISTOF
kathy.kristof@latimes.com