Help Is on the Way for Student Loans

Relief is just around the corner for the many young Americans who struggle under the weight of student-loan debt.

On July 1, a new federal program aimed at easing the monthly burden on college graduates making hefty loan payments on modest salaries. The new Income Based Repayment plan is supposed to cap monthly payments at an amount considered affordable based on income and family size.

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For most eligible borrowers, payments will amount to less than 10 percent of their income, according to the Project on Student Debt, a nonprofit group that operates a Web site explaining the program.

Income Based Repayment also will forgive student-loan debt that remains after 25 years of payments. And graduates who enter public service careers may qualify for loan forgiveness after 10 years.

This new program is in addition to the Income Contingent Repayment and economic hardship deferments plans already available to student-loan borrowers.

The Income Based Repayment option applies to Stafford, Grad PLUS or consolidation loans made under either the Direct Loan or Federal Family Education Loan programs. It does not apply to loans currently in default, parent PLUS loans, consolidation loans that repaid a parent PLUS loan or private student loans.

The eligible loans can be new ones just entering repayment or existing loans that have been in repayment for years. They could have been used to pay for any type of education, including undergraduate, graduate, professional and job training.

Borrowers looking to take advantage of this program will need to contact their lender to apply. Lenders will determine eligibility. It remains to be seen how prepared these lenders will be to handle a flood of applicants beginning next week. So patience may be needed if you're looking to take advantage of this new option.

Sallie Mae, the nation's largest student lender, has posted a worksheet to help borrowers determine their eligibility, but you will have dig through the company's Web site to find it. It's located on the "Income-based repayment" page within the "After Graduation" section of salliemae.com.

The Project on Student Debt estimates that at least 1 million student loan borrowers will be able to lower their monthly payments under the new plan.

Mandated by the College Cost Reduction Act of 2007, the Income Based Repayment program relies on a sliding scale that incorporates income, family size and state of residence.

Under this formula, monthly payments under a standard 10-year repayment plan are capped at 15 percent of the portion of family income that exceeds 150 percent of the federal poverty level.

For example, for a single person with no dependents and an adjusted gross income of $30,000, the maximum monthly payment would be $172.

Assuming this person had borrowed $25,000 at 6.8 percent interest, that $172 monthly payment would mean paying $116 less each month than the $288 that would have been due under a standard, 10-year repayment plan.

The key benefit of Income Based Repayment is that it can make your payments more manageable early in your career when your earn less. However, these lower monthly payments may result in longer repayment periods and additional interest costs.

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