If you have federal student loans, you’ve probably heard about President Obama’s proposed changes to the Income Based Repayment Plan, which could affect 1.6 million borrowers starting as early as January 2012. This was an initiative already approved by Congress, however, President Obama intends to implement these changes two years early by executive order.
During his speech at the University of Colorado in Denver, Obama recalled his struggles with student loan debt, stating he and his wife owed over $120,000 after graduating from Harvard Law School. “In a global economy, putting a college education within reach for every American has never been more important, but it’s also never been more expensive,” said a statement from the White House.
Students are in more debt than ever before. According to USA Today, outstanding student loan debt will exceed $1 trillion for the first time this year. Without a decent paying job, how are students supposed to begin paying back their debt? That’s where the changes to the Income Based Repayment Plan have the potential to make a major impact. The “Pay as you Earn” plan, as it has been called, base your monthly payment on your Adjusted Gross Income.
Repayment plans can be seriously confusing – what is the difference between the Income Repayment Plan and the Income Contingent Repayment Plan, and how do both of these differ from the Graduated Repayment plan? Why would any of these plans be better than the Standard?
Four years and a Master’s degree later, you better believe I pay attention. After taking out my full tuition in federal loans for graduate school, my monthly loan payment is fairly high. I wanted to pay off my loans as quickly as possible, but like many recent graduates, I knew I could not afford the over $600 monthly payment I’d be responsible for under the Standard 10-year Repayment Plan. After graduate school I chose the Graduated Repayment Plan, which means my monthly payment increases every two years, assuming my salary will also increase.
I hadn’t done my research into the Income Based Repayment Plan and after doing so, I decided to switch. Currently the IBR plan caps monthly loan payments at 15% of discretionary income with debt being forgiven after 25 years.
Obama is proposing that monthly payments be capped at 10% of discretionary income and loans forgiven after 20 years; 10 years if you work in public service.
In order to qualify:
You must never have defaulted on your student loans. If you have ever defaulted then you do not qualify. Secondly, what you owe in student loans must be greater than your Adjusted Gross Income. According to Fox Business and Heather Jarvis, the changes will only apply to students who took out their first federal student loan in 2008 or later and who will also take out federal loans in 2012. This makes a huge difference, however, a spokespersons for the Direct Loan Servicing Center and the Student Federal Aid Information Center were both unable to confirm this requirement.
Whether or not your payment is 10% or 15% of your discretionary income, the IBR plan has some great benefits. “About 5 months ago I switched from a graduated payment plan to IBR because the temporary job I had at the time was coming to an end. In order to make arrangements for my upcoming unemployment it was necessary that I decrease my loan payments as much as possible. IBR was the best option for me,” said Kevin Towler, a 2010 graduate of Georgetown University Law Center. “Since I was still finishing school and studying for the bar during 2010, my AGI for 2010 was actually negative. Thus, my mandatory minimum monthly payment under IBR for 2011 is zero. Also, I am still allowed to make payments in any amount in order to try to keep up with accruing interest.”
To find out if you qualify for the IBR Plan:
You can go to the Federal Student Loan Servicing website at myedaccount.com and click on “Lower My Payments.” You’ll need to enter your gross salary, monthly income and family size. The site will tell you which payment plans you qualify for and will estimate your monthly payment under each plan. If you qualify and choose to switch to the Income Based Repayment Plan you will have to mail either a signed copy of your most recent tax return or a consent form for the IRS to release your AGI to the Direct Loan Servicing Center.
Of course every repayment plan has ups and downs – paying your loans off in 20 years versus 10 years obviously means you end up paying more in interest. If you are making tons of money and can afford a higher monthly payment while still saving money – then stick with the Standard repayment plan. That will ensure you pay the least amount of interest over the least amount of time. However, if you’re monthly loan payment is overwhelming and there’s not much money left over for savings, then the Income Based Repayment Plan is a solid alternative option.
Currently the IBR plan requires a minimum payment of 15% of your annual discretionary income, and your loans will be forgiven after 25 years. If you qualify for the changes, then staring in January your required minimum payment will be 10% of your annual discretionary income and your loans will be forgiven after 20 years. Discretionary income is determined by your AGI minus 150% of the poverty guideline based on your family size and state of residence.
In Massachusetts that number is $16,245 (based on a family size of 1). So, if you’re AGI is $30,000 you’re monthly loan payment would be roughly $115 ($30,000 – $16,245 = $13,755, which is the discretionary income. 10% of discretionary income is $1,375 which is $115 per month.) Under the current terms (15% of discretionary income) you can estimate that your monthly payment would be roughly $172. When you’re making $30,000 a year, that amount makes a difference.
Another change that has the potential to benefit up to 6 million borrowers, is those borrowers with at least one direct loan and one Federal Family Education loan will be able to consolidate, allowing them to make one payment every month instead of two separate. This could decrease their interest rate by up to .5 percent.
There has been controversy over these changes; just read the comments below the article on The Washington Post. For me, whatever Obama’s intentions for implementing these changes early are, I am happy he is paying attention. I hope to be able to see my savings account begin to grow a little.
What do you think of this new initiative to help student debt relief?