Help for Students Struggling to make Loan Payments

July 1, 2009

By Nicole Mayer:

The government just unveiled an Income-Based Repayment plan to help those federal student loan borrowers struggling to make student loan payments.

The new plan allows those in repayment to tailor their payments based on income and family size.  For most eligible borrowers, the plan will cap payments at 10% of a person’s income, and even less for those with lower earnings and larger families.

To be eligible under the Program, you must have either Direct Loans, FFELP Loans, Grad PLUS loans or a consolidation loan made under any of these federal programs.  You must also have enough debt relative to your income to qualify for a reduced payment.  You may be eligible if your federal student loan debt is high relative to your family size and income.

The Plan uses a sliding scale to determine payments.  For example, if you earn below 150% of the poverty level for your family size, your required loan payment is $0.  If you earn more, your loan payment will be capped at 15% of whatever you earn above that amount.  To make things more clear, the Federal Office of Student Aid has provided a calculator to help you determine your eligibility and payment amount.

A married person who files a tax return as “married filing separately” is permitted to only count the borrower’s adjusted gross income and student loan debt.  This allows the borrower to exclude the income of his or her higher earning spouse when calculating the cap on monthly payments.

What is slightly unclear is how the calculation is done for married persons filing jointly who both have student loan debt. When the Consumer Warning Network contacted the Federal Office of Student Aid, we were directed to “contact your lender” for additional details.

If you choose to participate in the Plan, you will need to contact your lender, who will help you determine your actual payment.  You will also be required to submit annual documentation regarding your income and family size.

After 25 years of qualifying payments, the remaining federal student loan debt can be forgiven.  There are also additional benefits to the program, including the possibility of loan forgiveness after ten years of public service for those with Direct Loans. If you have a different type of federal loan, you may be able to consolidate those loans into the Direct Loan Program so that you can take advantage of the Public Service Loan Forgiveness Program.

For additional information, visit the Office of Federal Student Aid’s website which explains the Income Based Repayment Plan.

**We’d like to hear about your efforts to participate in the program. Please send us an email telling us about your experience.