Income-Based Student Loan Repayment: What You Need to Know

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Income-Based Student Loan Repayment: What You Need to Know
January 29, 2010 - 2:11 pm
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David RandallBio | Email
David Randall is a staff writer for Forbes

UPDATED Feb. 1st.

Since writing about President Obama’s plan to modify a program that lets borrowers with federal student loans base their monthly payments on how much they make, rather than how much they owe, I’ve received several emails from readers with questions.

Here’s a little background. Income-based repayment was passed by Congress in 2007, and allows borrowers to cap payments at 15% of their income above a poverty standard, defined as 150% of the poverty level for the borrower’s family. For a single person without children, the poverty standard is $16,245. (This link will take you to the 2009 federal poverty lines based on the number of people in a family.)

Any balance not paid off after 25 years is forgiven, though the IRS will consider this taxable income. If the borrower goes into the public sector, then his loans will be forgiven after 10 years and the IRS will not consider the forgiven balance taxable.

The president's plan would lower monthly payments to 10% of what the borrower makes above the poverty standard, and allow loans to be forgiven after 20 years instead of 25.

If you want to estimate what your monthly payments would be under the new income-based repayment plan, check out this calculator from Forbes (which is based on the payments that a single filer without any children would make.)

Have a question? Leave it in the comment section and I'll try to get an answer for you.

Q: Is this available for private student loans?
A: No, income-based repayment is only available for federal Stafford, Grad Plus, and Perkins loans. There are no current plans to require private student lenders like Sallie May or Chase to allow income-based repayment.

Q: What are the salary requirements?
A: There are no salary requirements to qualify for Income-Based Repayment.

Q: How do I know if my lender offers income-based repayment?
A: You should call your lender and ask them about alternative payment plans. If the lender does not allow a borrower to choose income-based repayment, you can consolidate your federal student loans through the Department of Education's Direct Loan program. All loans consolidated this way are eligible for income-based repayment.

Q: How would this proposal actually be passed? Will President Obama issue an executive order?
A: An executive order is unlikely, says Mark Kantrowitz, the publisher of FinAid and an expert in student loans. Instead, it will likely be attached to a Senate bill called the Student Aid and Fiscal Responsibility Act of 2009. The House has already passed a version of this bill, and could approve the changes to the income-based repayment plan in conference.

Q: How much will this program cost?
A: Estimates range between $1 billion and $2 billion over five years.

Q: Is income-based repayment available for older loans? Will loans older than 20 years be forgiven right away?

A: Most federal student loans are eligible for income-based repayment, no matter how long ago they were issued. However, choosing this repayment option will start the clock over again. That means if you’ve been paying off a loan for 15 years and decide to switch to income-based repayment now, you will have to wait another 10 years for your loan to be forgiven if you go into public service and other 20 years if you work in the private sector. The only exception to this rule is if you were previously in an income-contingent payment program.

Q: Is this available if your loans are in default?
A: “Technically speaking, you could be eligible for income-based repayment if you defaulted on your loans, but practically speaking you’ll have to rehabilitate your loan first,” said Mark Kantrowitz, a student loan expert at FinAid. To rehabilitate your loan back into good standing, you’ll need to voluntarily make 9 out of 10 consecutive monthly payments for the full amount.