College graduates facing mounting student loan debt may find relief in the new Income-Based Repayment plan that took effect Wednesday. Designed to take into account monthly income and family size, graduates with outstanding federal loans can see their minimum payments cut to less than 10% of their earnings.
“We know many graduates are concerned about their ability to repay student loans in the current economic environment,” said U.S. Secretary of Education Arne Duncan. “This new plan addresses the issue head on by giving them the option of a monthly payment tied to their income.”
The federal government’s program is aimed at helping student borrowers who cannot feasibly repay their loans in a 10 year period. Program enrollees who do not repay their loans after 25 years will have their debt forgiven. Under the program, those working in the public service sector – fireperson, police officer, librarian etc. – will see their debt forgiven after 10 years of repayment.
“Students who owe more in loans than they make in a year are probably going to be eligible for a reduced payment under this program,” says Haley Chitty, spokesperson for the National Association of Student Financial Aid Administrators.
To apply for income based repayment, students should contact their lender directly. Students with Direct Loans from the Department of Education can apply directly to the federal government online. To find out who is servicing your loans, borrowers can visit the National Student Loan Data System database.
To remain eligible for the program, borrowers must certify their family size and resubmit tax information annually, which will also be used to determine if lenders should change borrowers’ monthly payment based on the updated information, Chitty said.
The Department of Education would not speculate how many borrowers will benefit from the program.
But the new program doesn’t mean students will be driving down Easy Street. Stretching out payments could result in increased interest paid on loans over the long run. Also, the program does not include private loans, which have become more necessary with rising tuition rates.
The Department of Education also announced other major student loan changes:
— The maximum Pell Grant will increase to $5,350 for the 2009-10 school year, a 13% year-over-year.
— Stafford loan rates will drop to 2.48% from 4.21%, on loans that originated before July 1, 2006.
— The fees to originate a new loan will fall by half of a percentage point. Next year, it will fall by that much again.
For more tips and tools visit: