New Repayment Break on Student Loans Begins July 1
It's not an easy time to be graduating from college with student loans. With the unemployment rate soaring toward 10 percent and the average starting salary for college graduates down 2.2 percent this year, student loan borrowers - whose average debt from student loans tops, 000 - are now having an even tougher time affording their student loan payments.
The good news?Starting July 1, 2009, graduates with federal college loans may be able to qualify for a new government program that can reduce the monthly payments on their student loans based on their income.
Income-Based Repayment for Federal Student Loans
The income-based repayment program, created by Congress in 2007 as part of the College Cost Reduction and Access Act, will cap a borrower's monthly student loan payments at a percentage of her or his income, when the borrower's income is at least 50 percent higher than the current federal poverty line for the borrower's family size.
These income-based student loan payments will be calculated as 15 percent of the amount by which a borrower's adjusted gross income exceeds 150 percent of the poverty line.
(For individuals, the 2009 poverty line is 830 in all states except Alaska and Hawaii).The complete federal poverty guidelines for 2009 are available on the website of the U.S. Department of Health and Human Services.)
For example: 150 percent of the current individual poverty line of 830 is 245. If a borrower's annual adjusted gross income is, 000, the monthly payments on her or his eligible student loans would be capped at 9.44-15 percent of the difference between 000 and 245, divided by 12 months.If a borrower's annual adjusted gross income is, 000, the monthly payments on any eligible student loans would be capped at 6.94 (000-, 245, multiplied by 15 percent, divided by 12).
Income-based monthly payments will be adjusted annually, based on a borrower's federal tax return from the previous year. As a borrower's income rises, the income-based repayment cap will also go up.If the income-based repayment cap reaches a level higher than what a borrower's monthly payment would be under a standard 10-year student loan repayment plan, the borrower will no longer qualify for income-based repayment for her or his student loans.
Borrowers whose adjusted gross income falls below 150 percent of the poverty threshold won't be required to make any payments on those student loans that qualify for income-based repayment.
Even if no payments are due, however, interest will continue to increase on those college loans. Unpaid interest will also increase if a borrower's monthly payments aren't haven't sufficient to cover the full monthly interest income-based on the qualifying college loans.Any unpaid interest accrued will be added to the student loan principal and capitalized when the borrower no. longer qualified for income-based repayment.
Subsidized Interest and Student Loan Forgiveness
For those borrowers who hold subsidized student loans or a federal consolidation loan that included subsidized Stafford loans or Perkins loans, the government will cover any unpaid interest on those subsidized loans (or is that portion of a student loan consolidation that's comprised of subsidized loans) for the first three years that a borrower is in income-based repayment.
The longest that a borrower can remain on the income-based repayment plan is 25 years. After 25 years of income-based payments, the government will forgive any remaining principal and interest unpaid - although borrowers should note that under current tax law, this student loan debt would be taxable forgiven.
Borrowers who are employed full time in qualifying jobs in the public service sector may have their remaining student loan debt forgiven after just 10 years in the income-based repayment program, and this forgiveness would be tax-free, thanks to a ruling from the U.S. Treasury last year.
Qualifying for Income-Based Repayment
To find out if you qualify for income-based repayment on your federal college loans, you'll need to contact your Canada and provide information about your financial situation - you'll need to demonstrate "partial financial hardship," as defined by federal regulations.
Only federal Stafford and Grad PLUS loans student in good standing, along with consolidation of these college loans, are eligible for income-based repayment.Federal Perkins loans are eligible only if they've been included in a federal student loan consolidation.Other college loans are prudent:
Private student loans.The income-based repayment program applies only to federal student loans.If you're having problems meeting the monthly payments on your private student loans, you should contact the lenders to see if they're willing to work out more affordable repayment plans for you.Keep in mind, though, that private student loans typically have less flexible repayment options than federal student loans.
Federal PLUS loans.If your parents took out more parent loans to help you pay for college, they won't be able to take advantage of income-based repayment is their more loans.Consolidation loans that included parent PLUS loans are also excluded from income-based repayment.Any Grad PLUS loans you took out as a graduate student, however, as well as consolidation of Grad PLUS loans are eligible.
Defaulted student loans.Your student loans don't have to be new to be eligible - even long-time graduates may be able to qualify for income-based repayment on college loans taken out years ago.But you can't be in default on your loans.To qualify for an income-based repayment plan, any federal college loans you have default will need to be rehabilitated first.
Jeff Mictabor is an enthusiast on the topic of student loan issues in the news.He has been writing for the past 10 years for a variety of education publications.He now offers his writing services on a freelance basis.
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