If you're underpaid and overburdened by federal student loans, you're in for some relief.
A new loan repayment plan kicks in next month that can significantly reduce your monthly payment - in some cases drop it to zero - and will forgive any lingering debt after 25 years.
"People need this more than ever. It's making its debut at the right time," says Edie Irons, a spokeswoman with the Project on Student Debt.
The new Income Based Repayment Plan is just one of the borrower-friendly provisions taking effect next month in the federal loan program. Variable interest rates on older student loans will be falling to record lows. Fixed rates on certain new undergraduate loans are due to drop. And Pell Grants awarded to the neediest students are going up.
First, the Income Based Repayment Plan.
Usually, you must repay your student loans in 10 years. But this Income Based plan will tailor your payments based upon how much you earn, potentially requiring much smaller payments over a longer period. The program is targeted at those with hefty debt compared to their pay, often the case for public service workers.
Irons estimates at least 1 million people will be eligible for the new payment plan.
The Income Based plan only applies to federal student loans, such as Stafford and Grad PLUS. It won't cover private and parent PLUS loans or loans in default.
The Income Based formula is a bit complicated.
Basically, Irons says, "If you owe more than you earn in a year, you're probably eligible."
Under the plan, if you make below 150 percent of the poverty line for your household size, your payment would be zero. That threshold works out to be $16,245 this year for singles in Maryland and most other states; $33,075 for a family of four.
"You still owe the money," possibly along with accruing interest even if payments are zero, says Bob Murray, a spokesman for USA Funds, the nation's largest loan guarantor. If your income later improves enough, payments will kick in.
If your income is above that income threshold, your monthly payment under the Income Based plan won't exceed 15 percent of your discretionary income.
The lender will review your income every year, so payments could go up or down with your paycheck.
To figure what your payments would be under the Income Based plan, use online calculators at ibrinfo.org or finaid.org.
