A Couples Approach to Student Loans

July 29, 2010 — -- Week in, week out, readers e-mail me with questions about crushing student loan debts and how to find relief.

Honestly, in most cases, the financial damage has been done and I often feel there's not much help I can offer. But an Illinois woman I heard from not long ago raised an issue that, as it turns out, underscores a recent change to a federal student loan program. It could be the solution she and her husband -- and many other young couples just like them -- are looking for.

Q: My husband and I have recently finished our schooling and are trying to research the best way to tackle our student loans. I am a teacher and have obtained two master's degrees and wondered if I am able to consolidate the two loans. Also, being that my husband and I both have student loans, can we qualify for the Income Based Repayment Plan? If so, is that something I should pursue separately or combined? -R.V., Joliet, Ill.

A: R.V., there's good news for you and your husband, thanks to a change in federal law that could lower your monthly payments as you begin your careers and start chipping away at that debt.

On July 1, a change to the Income Based Repayment program equalized the treatment of single and married borrowers. The program, now a year old, limits monthly payments for borrowers working in lower-paying jobs.

Previously, the Income Based Repayment program factored in the dual income of a married couple when determining the eligibility of each spouse, but then did not take into account the couple's joint student-loan debt.

That meant married couples could be making monthly payments that were double what two single people in the same financial situation would be paying. Under the old rules, the married couple appeared to have a greater ability to pay down their loans compared to a comparable unmarried couple living together.

Talk about a huge incentive to avoid marriage. I can't imagine a bigger one for young, college educated couples.

Now, married borrowers who file their taxes jointly will have both their joint income and their joint debt factored in when determining whether the spouses qualify for lower monthly loan payments.

Joint Loan Consolidation No Longer An Option

In your case, R.V., this means the payments for you and your husband could be lower than what they would have been before this month. This assumes, of course, that you qualify at all for Income Based Repayment.

As for your question about loan consolidation, that option is no longer available. In 2006, Congress eliminated joint consolidation loans for married couples. But even if the option were still available, I most likely would have suggested you avoid it because it could have limited your flexibility.

In place since last year, Income Based Repayment caps payments on federal student loans based on the borrower's income and family size. For most eligible borrowers, IBR loan payments will amount to less than 10 percent of income, according to the Project on Student Loan Debt, a nonpartisan, nonprofit organization.

Income Based Repayment is available to those who borrowed money for college under either the federal Direct Loan or Federal Family Education Loan (FFEL) programs. A sliding scale determines how much a borrower can afford to pay each month.

If your monthly IBR payment does not cover the full amount of interest that accrues on your loans each month, the federal government will pay any unpaid, accrued interest on subsidized loans for up to three consecutive years. Note that unsubsidized federal student loans (which often account for a large share of student loan debt) are not eligible for this extra help, meaning the accrued interest would be added to the overall student loan debt.

Also, if you qualify for Income Based Repayment and meet other requirements, any federal student loan balance after 25 years of payments will be cancelled.

One key thing to know about Income Based Repayment is that there are several types of loans that do not qualify. These include Parent PLUS loans, private (nonfederal) student loans, and consolidation loans that were used in part to pay off a Parent PLUS loan -- even if a portion of that consolidation loan went to pay off a loan that otherwise would have qualified for Income Based Repayment such as a Stafford loan.

Student Loans: Bringing Debt Under Control

Consolidation loans used strictly to pay off FFEL or Direct loans do qualify.

R.V., one last point to make about your situation: In addition to qualifying for Income Based Repayment, you as a teacher may also qualify for the Public Service Loan Forgiveness program. It will forgive federal student loan debt after 10 years of qualifying eligible employment and on-time payments. Eligible employment includes in the government or nonprofit sectors.

For more information about these programs, visit the "Repaying Your Loans" section of the Department of Education's studentaid.ed.gov and IBRinfo.org, published by the Project on Student Loan Debt.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is a Certified Financial Planner professional and founder of Four Ponds Financial Planning LLC (www.fourpondsfinancial.com) in Falmouth and Mansfield, Mass. Contact McPherson at david@fourpondsfinancial.com