Income-based repayment program: lifeline for students drowning in debt...or a financial trap? - Coping with Student Loans after education

Income-based repayment program: lifeline for students drowning in debt...or a financial trap?
03.20.09
By Gerri Detweiler

Starting in July 2009, some student loan borrowers may find some relief from overwhelming student loan debt through a new program called the “Income-Based Repayment Program,” or IBR program.

The IBR program caps monthly student loan payments on federal student loans based on household income and family size. It also provides for the cancellation of remaining debts after ten years for those who work in public service, and twenty-five years for other borrowers who meet the program’s qualifications.

This new repayment option is available as of July 1, 2009 to borrowers with Federal Family Education Loans (FFEL), which includes Stafford loans, as well as those with federal Direct Loans. It does not cover private student loans or loans taken out by parents to help fund their child’s education through the FFEL or Direct Loan parent PLUS Loan programs.

Under the IBR program, your required monthly payment will be based on your income during any period when you have a partial financial hardship. Your monthly payment amount may be adjusted annually. If you repay under this plan and meet certain other requirements over a specified period of time, you may qualify for cancellation of any outstanding balance on your loans. Contact the Direct Loan Servicing Center (for Direct Loans) or your FFEL lender (for FFEL Program loans) for more information about the Income-Based Repayment Plan.

But the IBR program is not the "be all, end all" loan plan, warns Alan Michael Collinge, founder of StudentLoanJustice.org and author of The Student Loan Scam (Beacon Press, 2009) According to Collinge, the IBR program “certainly doesn't substitute for standard consumer protections.” He points out several pitfalls in the program’s design:

For borrowers with high debt/low income taking part in the program, their balance will increase significantly during the life of the loan. At the end of the term, the much higher amount that is forgiven may be taxable income.

If for whatever reason borrowers drop out of the program, particularly towards the end of the ten-year or twenty-five year period before cancellation, they will be hit with this extremely large debt. If they default, this will be an astronomical amount.

For borrowers already saddled with defaulted loans that are massively inflated with fees and interest above the original amount borrowed, this program is no help. The tax penalty alone would probably exceed the amount originally borrowed.

Congress took away bankruptcy protection from student loans mid-stream. One can imagine the multitude of ways that this program could be tweaked over time to benefit the feds as opposed to the borrowers.

Student loan borrowers who want to understand how the IBR program works can visit IBRinfo.org, a website created by the Project on Student Debt.