Despite the best intentions and efforts, many student loan holders are going to have to restructure their repayment plans this year. Those with federal student loans will have an easier time of it since the Department of Education offers a rather extensive list of options. If this includes you, one of the most popular repayment programs to apply for is Income Based Repayment.
Eligibility for Income Based Repayment depends on which loans you have taken out for your education. The following Federal Student Loans from the Direct Loan and Federal Family Education Loan (FFEL) Programs are the ones that qualify for application:
- Direct PLUS Loans (Graduate and Professional Students)
- Direct Consolidation Loans without PLUS Loans that were made directly to parents and not just as cosigners.
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- FFEL PLUS Loans (Graduate and Professional Students)
- FFEL Consolidation Loans without PLUS Loans that were made directly to parents and not just as cosigners.
Benefits Of the Income Based Repayment
First, your payment is based on what you earn. What you owe is not considered except to determine the extent of the financial hardship. The new monthly payment amount will not be higher than 10 percent of your discretionary income. This is the amount of income that you have remaining after paying rent or mortgage, utility bills, food and even automobile payments. This payment will not be higher than what you were paying under the standard 10 year repayment plan. In some extreme cases, graduates in the Income Based Repayment Program actually “pay” zero Dollars if their discretionary income isn’t high enough to meet the minimum amount. This is great for those who exit college with a huge loan balance and are hit with payments they cannot afford while looking for work, for example.
Second, there is the Interest Payment Benefit. If your new monthly payment isn’t large enough to pay the accruing interest on your loan, the Federal government will pay it for you for a period of up to but no more than three consecutive years once you begin your Income Based Repayment program. This is one of the many forgiveness aspects that Federal Student Loans offer.
Third is the limitation on interest capitalization. In the time that you are dealing with a financial hardship, there will be no capitalization of interest. Simply put, this means that interest will accrue on the loan, keeping the balance from growing beyond what you will be able to pay in the time allowed under the new Income Based Repayment Loan.
Forgiveness At End Of Term
Fourth is the 25 year forgiveness. The lifetime of an Income Based Repayment Loan is considered to be no more than 25 years. If over the lifetime of this loan, you make 300 qualified payments and the loan is still not completely paid off, any remaining loan amount will be forgiven and legally discharged. However, this discharged amount is considered taxable and must be paid for the year it was forgiven; i.e. a loan discharged in 2013 must be paid with other 2013 Income Taxes due in 2014. Its suggested that new law will be written to make forgiven loans not taxable, though no one knows what exactly will happen.
Public Sector 120 Months Forgiveness
Finally, there is the loan forgiveness for public service. If you make 120 on time, full monthly payments under an Income Based Repayment program while employed full time with a public service organization, you may apply to have the remaining balance of your loan or loans forgiven and legally discharged. This could save up to another 15 years of payments.
Interested applicants need to keep in mind that although there is no minimum payment with an Income Based Repayment Loan, the amount is recalculated every year. In addition to the criteria listed in the first benefit, family size and changes to income (including a spouse) will alter the required amount. This annual recalculation in the monthly payment depends on when the loan program was started. While you may have paid only five percent of your discretionary income for three years, getting a raise, a new spouse, having a child or getting laid off will definitely change your monthly payment either up or down. The good news is that if you income rises dramatically, you can change your repayment plan into a standard repayment at any time you choose.
While the Income Based Repayment Program is not an easy one to apply and qualify for, it certainly beats defaulting on your responsibilities and having that black mark on your credit report for many years to come. The benefits under this Income Based Repayment program are extensive and designed specifically to help individuals and families in financial need while ensuring that the Federal Student Loan Program stays healthy and available for future students. If you think this may be an option that can be good for you, please contact us here at Student Debt Relief to get started.