It’s one of the federal government’s best-kept secrets, and therein lies the problem.
It’s called income-based repayment, or IBR. It’s a creative way to help borrowers — in particular those not earning a lot of money — shrink their monthly student loan repayments.
The program essentially caps your monthly debt payment based on an appropriate percentage of your income and family size. Payments are also stretched out over 25 years.
Although the U.S. Department of Education program is two years old, so far only about 600,000 borrowers have enrolled. That’s disappointing, given that federal officials estimate that far more of the 36 million borrowers who owe $1 trillion plus in federal loans could qualify for this program.
The Education Department has been trying to do a better job of getting the word out.
Last month the department announced that it was working with the Internal Revenue Service on streamlining the application process so tax return income data can be imported directly into the income-based forms. Colleges and universities will also be receiving additional educational materials, so students will have a better understanding of their options.
Income-based repayment is available to anyone with federal student loans, such as Stafford, Direct and Perkins loans. If your financing came from what’s called private or alternative sources, such as a state agency, a nonprofit group, banks or other financial institutions, you do not qualify.
Confused? Contact your financial aid office to figure out who your lender is.
It should also be noted that federal loans already in default are not eligible for income-based repayment.
Under income-based repayment, monthly payments will be far less that what you would pay under the government’s standard 10-year repayment plan.
For example, a teacher carrying $60,000 in student loan debt, earning $50,000 and with one child, would pay $690 monthly under the traditional 10-year repayment plan.
But under the income-based option, the monthly payment over 25 years would be $282, according to the nonprofit Project on Student Debt.
There is a tradeoff. The interest rate on the debt won’t change, so the longer repayment period means you may pay more interest over the life of the loan.
However, if you pay like clockwork over 25 years and meet other requirements, any remaining loan balance will be erased. If you’re employed by a nonprofit or government agency, you could be eligible for loan forgiveness after 10 years.
To apply, borrowers need to contact their loan service provider directly. Processors need at least two months to crunch income data and fill out the paperwork, so new grads should start investigating this option. For more details, go to www.ibrinfo.org.
If you’re already in the program, you must provide your lender with updated income information before the anniversary of your enrollment to determine your payment for the next 12 months. Failure to do so could result in a much higher payment.
Income-based repayment has come under criticism from some who view it as a bailout. Like it or not, the last thing you want on your credit record is a default. That triggers a process that could haunt you for years.