Pssst…Want to Know The Best Kept Secret In Student Loans?

Are you scraping by, just barely able to make your student loan payments? Or maybe you’re making the payments, but worried you’ll be in debt forever? Make sure you haven’t overlooked one of the best repayment options out there. Lauren Asher, an expert on student loans and the president of The Institute for College Access & Success, an independent non-profit organization that works to make higher education more available and more affordable for people of all backgrounds, calls it the “best kept secret” in the student loan world.

Okay, so maybe it’s not totally a secret, but many eligible borrowers aren’t taking advantage of the Income-Based Repayment program, so it deserves all the attention it can get.

I recently interviewed Asher on my radio show, Talk Credit Radio. Here is an edited excerpt from that interview:

Gerri: Can we start off by discussing the trends in student loan debt?

Lauren: Student loan debt is touching more and more people’s lives every year. A generation ago, less than half of people who graduated from 4-year colleges had student loans. Now it’s at least two-thirds. And for the class of 2010, which is the most recent data we have, the average debt for those borrowers was more than $25,000.

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Gerri:  What about default and repayment rates? Are people having trouble paying back their student loans?

Lauren: Default rates have gone up recently although they’ve come down from a high a couple of decades ago. They do sometimes reflect changes in the economy. Certainly it’s harder to pay off your student loans when it’s harder to find good-paying jobs. But what’s important to know is not just how much you owe, but what kinds of loans you have that can really affect your options for repayment.

If you have federal student loans, there are actually a lot of good ways to keep those payments under control even in tough times. But you need to know what those options are and how they work before you get into real trouble. One of those options is the Income-Based Repayment Program.

Gerri:  Tell us about the IBR program and the benefits.

Lauren: Income-Based Repayment is the best kept secret in this whole student loan debate. It has been around since July 2009. It’s available to students with federal loans. So that includes Stafford loans and Grad Plus as well as federal Consolidation Loans.

If you have direct loans or what was used to be called “guaranteed” or “federal family education program loan,” whether you have had them for many years or just finished school, you can qualify for IBR if you’re earning relatively little compared to what you owe.

[Related Article: Student Loan Default Realities]

A good rule of thumb is, if you owe as much as you earn in a year, you probably qualify. But, there’s a calculator on our site—IBRinfo.org—and also a link to the department site and their calculator to help them figure it out. So the nice thing is that, once you qualify, your payment each year is adjusted based on your earnings and family size.

If you earn less than 150% of the poverty line for your family size, your required payment is zero. You remain in good standing, you’re not delinquent, you’re not in default. And those payments—even if they’re as low as zero—count towards either 25 years of forgiveness, meaning after you’ve made affordable payments for 25 years in IBR if you still owe anything it’s forgiven. Or if you work for a public or non-profit employer and you had a direct loan, you could get forgiveness in as soon as 10 years in IBR.

IBR provides two things. One, it provides you the assurance that your payment will be fair and manageable based on what you actually earn. The other thing it does is give you a light at the end of the tunnel. Repayments will not go on forever.

Even if you hit a patch where you can’t even cover your interest and your IBR payments are very low, eventually if you haven’t been able to pay it all off, it will go away and you can move on with saving for retirement, paying for your kid’s education and the other things you need to do.

[Student Loans: Research and compare options for student loans at Credit.com]

The Best Kept Secret In Student Loans (cont.) »

Image: Katie Tegtmeyer, via Flickr

Gerri: President Obama recently initiated some changes to the program, calling it “Pay As You Earn.” Can you talk about those changes?

Lauren: Right now what’s available for all borrowers—past, present and future—is the income-based repayment program that went into effect in 2009. There are two improvements that will be available in the future. One is called, “Pay As You Earn.” It was announced last October and it’s still not finalized, but it will go into effect in time for people who are in school now to benefit within a couple of years. It covers people who borrowed at least one loan in 2008 or later, and one in 2012 or later.

So for current students, a good way to think about it is that it will make IBR more generous. It will make the payment cap and the maximum payment you have to make even lower, and it will forgive any remaining debt after 20, rather than 25 years. Those same terms will apply with borrowers who took out their first loan during or after 2014. So all new borrowers starting in 2014 will have access to a more generous version of IBR. But IBR right now is still pretty generous and can really help people stay out of delinquency and default.

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Gerri:  What about borrowers who have some loans that are maybe years, or even decades, old that they’re still trying to cope with. What options do they have?

Lauren: If a borrower is not in default they could have access to income-based repayment. They just have to meet the basic debt-to-income criteria. The nice thing about income-based repayment or IBR is that it applies to those past, present and future borrowers of federal student loans.

Gerri:  What if you’re in default? Are you eligible for IBR?

Lauren: You’re not eligible for IBR if you’re in default and it takes nine months of non-payment to default on the federal student loan. Hopefully, more people will find out about IBR and use it before they reach that point because once you do default on a loan, the consequences are quite severe.

Gerri:  I interviewed a woman who had student loan debt cancelled and then ended up with a big tax bill as a result of the cancellation of debt income. What about with IBR? If you have student loans forgiven at the end will you have to pay taxes on the forgiven amount?

Lauren: Under current law, it would be taxable. However, we worked very hard and have a lot of support in Congress fixing this problem. I’m confident we’ll get it long before anyone qualifies for forgiveness under IBR. Public service loan forgiveness, if your debt is forgiven, is not taxable.

[Related Articles: 8 Ways to Ease the Student Loan Burden]

Gerri: How long does it typically take to get approved for IBR?

Lauren: We have heard everything, from a couple of weeks to three months. And there have been some instances of lost paperwork. It’s really important for borrowers to speak up and, if they are having any problems, file a complaint with the Consumer Financial Protection Bureau because they will track and help figure out where the problems are.

Overall, though, we know that more than 630,000 people are now enrolled in IBR and the pace is picking up. So even if it takes a little while, just keep in touch with your servicer and make sure you’ve got all your paperwork in, keep copies of everything that you submit and when you sent it and you should be alright.

Learn More: 

Listen to the entire interview with Lauren Asher, including tips for borrowers with private or parent student loans:

Listen to the interview online here.

Or download the interview here.

You can also listen or download the podcast on iTunes.

[Student Loans: Research and compare options for student loans at Credit.com]