(And Get Your College Debt Erased)
If taking on college loans makes you nervous this might be the most important information you read about all year.
A newer government program that links payments on federal student loans to income and forgives balances has become available and not many students are aware of it. The key benefit being that those working in public service could have their debts erased after 10 years.
If your child is looking into working for the government after college, this program is definitely worth looking into. A provision of the College Cost Reduction and Access Act of 2007 could reduce monthly payments for hundreds of thousands of borrowers who qualify for the new Income-Based Repayment.
Borrowers who work in certain public service jobs could also have the balance of their loan erased after making qualifying payments for 10 years, called Public Service Loan Forgiveness or PSLF.
So, will your student loan be “bailed out”? In a word: maybe. There are obviously restrictions to qualify. A 2-page fact sheet on the details of the PSLF can be found here:
At the very least, the IBR program will lower the monthly payments of people who accumulated significant federal student loan debt but don’t have the income to make the payments on the standard 10-year repayment plan.
This relief may reach as many as 1 million people, according to the Project on Student Debt. And despite lower payments, the former students won’t be paying off their loans indefinitely — any remaining balance will be forgiven after payments are made for 25 years.
Basing loan payments on income isn’t a new concept. For years, graduates with federal student loans had options to reduce or eliminate their payments, depending on how much money they made. But IBR is intended to be more generous.
IBR caps monthly payments at 15% of earnings above 150% of the poverty line, or $10,830 for a single-person household.
There are even situations in which an
IBR payment would be zero. If your payment is so low it doesn’t cover the interest accruing on your loan, the government will pay the interest for three years on subsidized Stafford loans, which are government-backed loans given to financially needy students that do not accrue interest while the borrower is in school. After that period, and for all of the other kinds of unsubsidized federal loans, unpaid interest will accrue but will not compound. In other words, you won’t be charged interest on top of interest.
Borrowers who think they could benefit from IBR should contact their lender and ask for an application that will authorize the release of their adjusted gross income from the Internal Revenue Service each year.
Student loans can have a big influence on career decisions. Even former students with good jobs say their monthly loan payments make it hard to buy a home, start a family or save for a rainy day.
But keep this in mind, IBR and public-loan forgiveness won’t be an option for many borrowers.
More than likely, your family is going to have to still pay a significant amount for college out-of-pocket. Your goal should be to try to minimize your total out-of-pocket costs as much as possible through a combination of the following:
- Saving as much as possible before college starts (preferably in an account that has guarantees built in)
- Restructuring cash flow to free up more disposable income to pay for college
- Maximizing the amount of financial aid your family is eligible for
- Picking the right school that really wants your student and will offer them significant merit-based funds
- Ensuring your student is laser focused before college begins so that they graduate in 4 years
- Taking a minimal amount of low interest student loans (even if you as a parent wants to pay them – student loans are almost always a better deal)
Until next time,