New Federal Loan Repayment Plan Provides Relief for Student Loan Borrowers

January 16, 2010

Author: Persis S. Yu

On July 1, 2009, the federal government made a new student loan repayment program, Income-Based  Repayment, available to borrowers. This new repayment option makes student loan payments more affordable for many more people.  Under the Income-Based Repayment (IBR) program, a borrower’s monthly payment on federal student loans is capped based upon the borrower’s income and family size. The payment amount is 15 percent of any income greater than 150 percent of federal poverty level for the borrower’s family size. Any remaining loan amount after 25 years will be cancelled.

When most legal and social service staffers think about student loan repayment, they think of their own financial situation, however, the changes to federal student loan laws can provide much needed relief for many of their clients as well.

For borrowers struggling to pay off high student loan debts on a public service salary, the new IBR program can dramatically reduce monthly payments. For an unmarried borrower with $100,000 in federal student loans earning $40,000 a year, a monthly payment can be reduced from approximately $900- $1000 per month to around $300. (See chart.)  Furthermore, in 2007, Congress passed the College Cost Reduction and Access Act.  The CCRAA included a Public Service Loan Forgiveness program, which may also be applied to this debt, and can be used to waive any remaining debt for borrowers engaged in qualified public service for 10 years (following October 1, 2007).

Source: U.S. Dept. of Education

In addition to the relief provider for public interest workers, the IBR program can be especially helpful for low-income people.  A common frustration with federal student loans is that there is little relief from collection – regardless of the amount of time passed since the loan originated or the source of borrower’s income.  Although, in some circumstances, federal student loan debt may be eliminated through bankruptcy or a disability waiver – success with either option is rare.  As an alternative to waiving the debt, under the new IBR program, anyone earning less than 150% of the federal poverty level will have a monthly payment of $0.  This includes those receiving public benefits, such as social security disability and social security insurance.

Borrowers already in Collection

Unlike any other debt collectors, the federal government has nearly unlimited powers to collect on unpaid federal student loans. It can garnish otherwise protected income and there is currently no statute of limitations for the government to bring a collection action. However, through consolidation and/or rehabilitation, many borrowers can get out of these debt collections and enroll in the IBR program. The first option is for a borrower to consolidate her loans into the Direct Loan program and then select Income Based Repayment.  Alternatively, both the Direct Loan program and the Guaranteed (FFEL) program allow borrowers to rehabilitate their loans by making “reasonable and affordable” payments on-time for nine out of ten consecutive months. Both options are complicated and require borrowers to jump through substantial hoops, but these alternatives can protect borrowers from garnishment and possibly even improve, their credit.  When choosing these options, be careful because each option is only available to borrowers one time.

The Down Side

Although, the IBR program will lower the monthly payment for many borrowers, it is not a long term debt management solution.  For the first three years in the program, if the monthly payment amount does not cover the amount of interest accrued, the federal government will pay the interest on any Subsidized Stafford Loans.  However, unsubsidized student loan and subsidized loans after the three year period will still continue to accrue interest. So the size of the debt may actually increase over time. For borrowers that expect their financial situation to improve, repaying under this program will prolong the term of the student loan and increase the total amount paid on the loan, unless the borrower qualifies for the Public Service Forgiveness Program or some other waiver. Furthermore, under current tax law, the amount of any debt cancelled after 25 years is considered taxable income. (Debt waived under the Public Service Forgiveness Program is not considered taxable income.)

The Nitty Gritty

In order to qualify for the IBR program, a borrower must have her qualifying federal loans consolidated with Direct Loans. Qualifying loans must have originated in the Direct Loan or Guaranteed (FFEL) loan programs. They include Stafford, Grad Plus, and federal Consolidation loans that do not include Parent PLUS loans. Perkins loans are eligible if you consolidate them into a federal guaranteed (FFEL) or Direct Loan.

When consolidating into the Direct Loan, borrowers must select a payment plan. Unfortunately, borrowers cannot consolidate directly into the IBR program; rather they must select one of the other repayment plans. Only after the student loans are successfully consolidated can borrowers change their payment plan to IBR.  This entire process can take several months, so borrowers who cannot afford the payments under one of the other repayment options should contact Direct Loan to explore deferral or forbearance options.

For more information:

IBRinfo, www.ibrinfo.org (for addition information and an IBR payment calculator)
Student Loan Borrower Assistance, http://www.studentloanborrowerassistance.org
Federal Direct Loans, http://direct .ed.gov Monroe County Bar Association, http://mcba.org/academy/bookstore.html (to order or arrange viewing of “Debt Relief: Federal and State Loan Repayment Programs” for CLE credit)
National Student Loan Data System for Student, http://www.nslds.ed.gov/nslds_SA/  (to determine type of student loan)
Equal Justice Works, http://www.equaljusticeworks.org (for more information on the Public Service Loan Forgiveness program)