Loan program offers help for struggling grads

NEW YORK — There’s a legitimate way to shrink those student loan payments.

In coming weeks, the most recent crop of graduates will start receiving their monthly bills as the six-month repayment grace period comes to an end. That’s likely causing anxiety for those still struggling to get their careers off the ground.

To help ease the financial distress, federal education officials in recent weeks have been raising awareness about an underused program intended to lessen the burden for borrowers who don’t earn a lot. The program, called Income-Based Repayment, captured the national spotlight when President Barack Obama announced a plan recently to speed up a law that will make it more forgiving.

The renewed attention is expected help increase participation rates; the Department of Education says only 450,000 are enrolled, although it’s estimated far more of the 36 million borrowers in repayment would qualify in today’s bleak economic climate.

Stephanie Holstein, who graduated from the University of Notre Dame eight years ago with $30,000 in federal loans, says the program was an enormous help at a time in her life when money was tight. When she applied two years ago, she and her husband had just had twin daughters. She was only working a few days a week and he had his own business; their combined income was about $35,000. That enabled Holstein to have her monthly payments waived.

“For people who are just out of college and starting at the bottom, it’s a huge help to have a payment that matches what’s going on in your life,” said Holstein, now 31 and living in Missoula.

Although the program can provide relief for many, there are complexities and potential drawbacks borrowers need to understand. If you’re curious about whether the program can help get your student loan payments under control, here’s what you need to know:

The basics

One reason for the low enrollment rate in Income-Based Repayment, or IBR, could be a lack of awareness; the program was introduced just two years ago.

For those unfamiliar with its terms, the gist is that borrowers are required to pay no more than 15 percent of any income they earn above around $16,300. Those who earn less than that amount wouldn’t have to make any monthly payments.

Another key feature is that any remaining debt after 25 years is forgiven, or 10 years for those entering public service jobs. Holstein, for example, has since entered law school and plans to work for the government or a nonprofit once she graduates. That would mean her loans would be forgiven after 10 years.

Eligibility for the program is determined by weighing the amount of a borrower’s debt against income; to figure out whether you qualify, the Department of Education offers a user-friendly calculator at http://tiny0url.com/ l3ktdx.

A major drawback for many will be that the program is only available for federal student loans. Private loans, such as those issued through Bank of America, Wells Fargo or Sallie Mae, aren’t eligible.

There’s often confusion among borrowers over what type of loans they have, since federal loans until recently were available through private lenders as well. To get a rundown on your various loans, go to the National Student Loan Database System for Students at http://www.nslds.ed.gov /nslds—SA/ and click on “Financial Aid Review.”

As for Obama’s announcement, the changes likely won’t apply to borrowers who are already in repayment. The new law is seen as beneficial because it will lower the cap on monthly payments to 10 percent of discretionary income and forgive remaining debt after 20 years. The terms only apply to graduates starting next year; borrowers must have at least one loan in 2012 to qualify. The law had originally been scheduled to take effect in 2014.

In the meantime, borrowers may be able to benefit from a different program tweak that went into effect last year. Spouses can now use their combined student loans to calculate eligibility, so long as they file their taxes jointly. Previously, only the borrower’s loan balance was measured against total discretionary household income.

Another change last year lets borrowers use their current loan balances to calculate eligibility, rather than the amount they owed when they first entered repayment. So if your loans have been in deferment and grown as a result of interest charges, you may be newly eligible.

The drawbacks

Even though IBR can provide relief, it’s far from a free ride.

Consider the principles at work with other repayment plans, such as the standard 10-year plan and extended 25-year plan. The longer option is a more common way for borrowers to lower monthly bills by stretching out payments. The tradeoff is that the borrower will pay much more interest over the life of the loan.

The same rules apply to IBR; monthly payments are lowered, but the borrower remains in debt longer. So unless your debt load is big enough that you’d have a portion forgiven at the end of the repayment period, it might be worth stretching a bit to make payments under a standard repayment plan.

Graduates who earned $35,000 a year and had $25,000 in debt, for example, would have a monthly payment starting at about $235 under IBR and pay off the loan in about 11 years. That’s assuming their pay didn’t rise significantly. But by increasing payments slightly to $287 a month, borrowers would be able to repay their debt under a standard 10-year plan and save $1,360 in interest charges.

The difference with IBR is that any debt remaining is forgiven after a set time. So borrowers with the biggest debt loads have the potential to benefit the most if their balances are forgiven after 10 or 25 years.

“Not everyone is going to have the forgiveness occur; many borrowers will have paid off their loans by then,” notes Mark Kantrowitz, publisher of FinAid.org, which tracks the financial aid industry. “I’d guess that a very small percentage of borrowers are going to hit that 25-year mark.”

To see how your monthly payments and total costs would stack up under the IBR and standard plans, FinAid.org offers a calculator at www.finaid.org/ calculators/scripts/ ibr.cgi.

It’s also worth noting that IBR enrollees need to submit tax forms each year to verify their income so monthly payments can be adjusted accordingly. It could be that after several years of making payments, a higher income and lower debt level automatically bumps you into a 10-year repayment plan.