Relief for Many Student-Loan Borrowers

Independence Day will arrive a few days early for those of us trying to lighten the burden of heavy student-loan debt.

On July 1, a most eagerly awaited provision of the College Cost Reduction and Access Act of 2007 goes into effect. Students (and us long-out-of-the-classroom former students) who are struggling with their student loans will become eligible for Income-Based Repayment.

Just like it sounds, IBR allows borrowers to restructure their payments based on how much they earn, and also how many family members are in their households. Under the formula, borrowers won't have to devote more than 15 percent of their discretionary income toward student-loan payments, and most will pay much less. According to the helpful website IBRInfo.org, set up by the Project on Student Debt, a family of four with a combined income of $60,000 a year would have payments amounting to 6.7 percent of income.

As the borrower's income rises over time (hopefully), the payments will readjust upward as well. Under IBR, the payment period is 25 years, not the normal 10. Of course, the payments could be so low every month that they barely cover the interest, and the borrower could end up with a higher loan balance than before. But here's the best part about IBR: Any balance remaining at the end of the quarter-century will be forgiven.

“This law was passed in the middle of 2007, but it’s coming into effect at a time when probably more people than ever need help to afford their student-loan payments,” said Edie Irons, spokeswoman for the Project on Student Debt, based in Berkeley, California.

IBRInfo.org has a handy calculator in which you can punch in relevant information, such as annual income, loan balances, and interest rates, and see whether you qualify for IBR –– and if so, approximately what your monthly payment will be. I did this, and my estimated monthly bill was 5.7 percent of my income –– and less than one-fifth of what it would be otherwise.

The only bummer is that the formula really sticks it to married couples by assuming that you'll be able to use both your and your spouse's income to make payments –– even if the spouse also has loans! "This results in higher payments for both borrowers, a type of double-counting that is unfair and inappropriate for your situation," the IBR site informed me.

There are other caveats as well: IBR is available only for loans issued under the federal Direct Loan program, or through federally guaranteed loans issued by private lenders. Straight private loans that are not subsidized by the feds aren't eligible –– yet another reason to avoid getting a private loan if at all possible. IBR also doesn't apply to PLUS loans or federal consolidated loans that include them. You also can't be in default to qualify.

Borrowers must contact lenders directly to see if they can get their payments restructured under IBR. In the future, I'll write more about this law and relate my own experiences with it.

Landon Hall – A freelance writer in Silicon Valley, Landon was a reporter, sports writer and editor at The Associated Press in Portland and New York City from 1997-2006.

Tagged as: borrowers, College Cost Reduction Act, federal Direct Loan, IBR, income-based repayment, loan balance, PLUS loans, private loans, student debt, student loan payments, student loans

Landon Hall