A new program makes paying federal student loans more affordable for low-income borrowers

By Kim Clark

Posted January 30, 2009

A new federal program starting this fall promises relief and hope for millions of students and recent graduates burdened with big federal educational debts. Starting July 1, those with federal student loans can ask the government to limit their monthly payments on their federal student loans to less than 15 percent of their income. Many of those who qualify for the new Income-Based Repayment (IBR) program will pay much less than that.

Those who earn less than a base budget allowance of one and a half times the poverty level for their household (which was $10,400 a year in 2008 for a single person) won’t have to pay a penny on their federal student loans. Everybody else who qualifies for IBR will have to pay 15 percent of the difference between their income and the base budget allowance.

Best of all, those earning a low income because they are in public-service jobs can have their remaining federal student debts forgiven after 10 years of income-based payments. Those who maintain low incomes and stay current on their income-based payments for 25 years can also have their remaining debts forgiven, no matter what job they have.

Anyone hoping for public-service loan forgiveness should first consolidate their loans directly with the federal government, because private lenders won’t offer that goodie. Once that’s done, they can apply for IBR. Then, they’ll need to keep excellent records because the burden will be on the students to apply for forgiveness after 10 years of payments. They’ll have to prove that they made all the payments on time and didn’t violate any other rules of the forgiveness offer.There are plenty of other catches in the new program, warns Deanne Loonin, a student loan expert for the

In addition, she notes, the new program won’t reduce payments on defaulted student loans. Those who have already fallen so far behind on payments that they are in default will be rejected for the program. The program also won’t cover:

Private, alternative, or “signature” educational loans. Parent loans such as federal Parent PLUS loans or any kind of alternative or private loans Other pressing debts. If you earn enough so that your federal education debt makes up less than 15 percent of your income above the base budget—even if most of your earnings go to medical bills or private educational debt, you won’t qualify for Income-Based Repayment. The current rules will also likely disqualify, for example, debtors whose spouses are comparatively high earners—even if those spouses are also burdened with big education debts.