The government aims to help those with a great deal of student loan debt. In addition to arranging plans with your lenders, or applying for forbearance, the government will begin — on July 1 — a new program that helps you refinance your student loans, depending on your income. It is called the Income Based Repayment Plan.
Who qualifies for the new student loan debt program?
Those with lower incomes qualify for this student loan debt program, which allows you to make payments that are around 10% of your monthly gross income. In order to qualify, you have to have student loan debt of at least 1.5 times your your gross income. (This means I don’t qualify.) The loans included in the plan can be undergrad or grad. Professional job training certifications are also included.Your Stafford, Grad PLUS or consolidation loan of these programs are eligible. A parent PLUS Loan is not eligible. You can include old loans in this program.
For those who are having a hard time finding a job, or for those with a lot of debt relative to their income, this might be an elegant solution, one that works better than forbearance or deferment. One of the bonuses is that if you go into public service, what is left after 10 years is forgiven. If you choose the Income Based Repayment Plan, and you still owe after 25 years, that remainder is forgiven as well.
Here is an example chart of what you might pay, depending on your income and the size of your family (source: studentaid.ed.gov):
Drawbacks to the Income Based Repayment Plan
As you might guess, there are some downsides to this plan. While it can make meeting your obligations a little bit easier, there is a price to pay — in the form of increased interest paid over the life of your student loan debt. With a reduced payment, you are spreading your obligation out over a longer period of time. This means that you will probably pay more interest over the long haul. Most student loans are repaid over a period of 10 years, so that means extending out 25 years could mean a great deal of difference, even if you get the remainder forgiven.
You should also realize that you will have to submit annual documentation. This means that you have to maintain a low income in order to renew at your low income payments. If you fail to provide documentation, your payments will return to a standard repayment amount. Most lenders will probably send you reminders about renewing your documentation.
For those having difficulties due to the economy, this might be just the thing. However, it is a good idea to pay more when you are able to. Extra payments toward the principal should begin as soon as you can manage. In the end, the student loan industry is making money off of you, and the interest is money you could be using for yourself.
What do you think of the Income Based Repayment Plan for student loan debt?