New Loan Repayment Program Can Help Cash-Strapped Grads

By Staff
May 19, 2009

A new federal program beginning this July will cap monthly student loan payments based on income, providing relief to countless new graduates saddled with debt and facing a grueling job market.

Typically, most borrowers must begin repaying student loans within six months of graduation. Although payments can be deferred for up to three years because of economic hardship, interest often continues to accrue, resulting in an even larger debt to repay.

The new Income-Based Repayment program is based on complicated rules, notes the Chicago Sun-Times, but essentially anyone whose student loan balance is higher than one's annual income will probably qualify. Under the new program, borrowers will never have to spend more than 15 percent of their discretionary income -- an amount based on federal poverty guidelines -- on student loan payments.

A person who earns less than 150 percent of the poverty level would not be required to make monthly payments. (The 150 percent figure for a single person is $16,245 in the continental United States.) A person earning more than that level would make monthly payments based on a sliding scale. For example, someone repaying a $30,000 student loan earning a $30,000 salary would pay only $170 a month, compared to the $350 a month that a typical 10-year loan might require.

A calculator is available on the program's web site to determine what loan payments would be. If a borrower's income increases, student loan payments would increase accordingly.

The new program is particularly noteworthy, reports USA Today, because it forgives loans entirely after 25 years of qualifying payments. In the past, it was nearly impossible for borrowers to ever escape paying student loan debts.

"Most folks will see their incomes rise, and most will pay (the student loan) off, but for those who can't, there is a light at the end of the tunnel," said Lauren Asher, acting president for the Project on Student Debt, who was quoted in USA Today.

The program is limited to federal Stafford, Grad Plus and federal consolidated loans, so private student loans are unfortunately ineligible. Additionally, the income-based repayment program is only available to borrowers in good standing.

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