|Yes, that's the student debt monster about to take a bite out of your pay check. You can view the video "Ditch Your Debt Gremlin" by the Project on Student Debt regarding Income Based Repayment at The Skanner's YouTube Channel|
Embedded in the historic health care legislation signed into law in March was a set of reforms to student aid that work to reduce the cost of college for borrowers and increase the number of need-based Pell Grants.
The bill did away with the system of providing students with federally guaranteed loans from private lenders, instead providing all federal loans through the Department of Education's direct loan program.
According to the nonprofit Project on Student Debt, the new law contains an especially important reform of the Income Based Repayment system. Income Based Repayment allows certain qualified individuals to make payments on student loans that are commensurate to their income.
Currently, IBR makes it so a borrower of a federal loan does not have to spend more than 15 percent of their discretionary income on student loan payments, and any remaining balance after 25 years of payments is forgiven. For borrowers taking out their first federal loan after 2014, that cap is lowered to 10 percent of discretionary income and remaining loan balance is forgiven after 20 years of payments.
"This legislation represents an historic step toward making college more affordable and helping all Americans complete a degree or certificate program," said Lauren Asher, president of the Institute for College Access and Success. "Streamlining the federal loan program and guaranteeing a minimum annual Pell Grant increase are necessary and overdue reforms that lay a strong foundation for future investments in students and families."
The IBR program has a significant effect on individuals and families who are burdened with high student aid debt to income ratios. According to the Department of Education, in order to qualify for IBR, your loan payment on a standard 10-year repayment schedule would have to be higher than 15 percent of what you earn above the 150 percent of poverty level.
Although many of the reforms that will significantly reduce the cost of a loan won't go into effect until 2014, current borrowers with direct loans or subsidized Stafford loans qualify. Unfortunately, parents who have taken out federal loans for their children do not qualify (please see http://studentaid.ed.gov/ for a full listing of restrictions and qualifications).
Interest on your loans does accrue at a normal rate for the these loans, but the federal government will pay interest on the first three years of subsidized and direct loans.
"Our country needs this reform now more than ever, as the economy drives people to seek education and training but leaves them less able to pay for it," Asher said in a statement.
Many of those who find themselves with high student debt while receiving median wages are those in public and nonprofit sectors of the economy. Although the motivation of the Public Service Loan Forgiveness program is to encourage workers to choose public service careers, not charity, the result is clear – if you're working for a public or nonprofit sector employer and making payments under the Income Based Repayment plan, your eventual student loan bills might be a lot lower than if you'd chosen that job in the private sector.
For workers who make 120 on-time, full monthly payments while under the employ of any body or agency of the government or a 501(c)3 nonprofit, the remaining balance on federal loans is thereby forgiven. The loans do not need to be made consecutively to qualify, but each qualifying payment must be made while employed by a qualifying employer.
In addition to these improvements in student lending, the federal Pell Grants will increase according to the consumer price index, starting in 2013.
For more information about these loan payment programs, please follow the links at