Student Loan Blog : income-based repayment plan

Student Loan Default Rate On the Rise

Student Loan Girl — Mon, 20 Apr 2009 23:02:00 GMT

Weighed down by job losses, limited job availability, and lower salary wages, college graduates — who leave school owing an average of $22,500 in student loans — are defaulting on their federal student loans at the highest rate since 1998 (“In Grim Job Market, Student Loans Are a Costly Burden,” The New York Times, April 18, 2009).

“When it comes down to making your student loan payment or buying gas to go to work, it isn’t a difficult decision to make sometimes,” said David Clark of College Assist, a national guarantee agency that helps its borrowers stay current on their college loans (“Student-Loan Debtors Get Breaks,” The Denver Post, April 12, 2009).

Student loan borrowers who fail to pay on their federal student loans could have 15 percent of their wages garnished, could lose their state and federal tax refunds, and could lose a portion of their Social Security benefits. And many borrowers have learned that, unlike other types of unsecured loans, student loans typically cannot be discharged in a bankruptcy filing.

But borrowers may be able to avoid taking the drastic step of filing for bankruptcy or avoid having the government seize their money by working out a repayment resolution with their lenders, Clark said.

“Once we can get someone on the phone, we have a 90 percent rate of curing an account and keeping it out of default,” he said.

Federal Student Loan Repayment Options

Deferment or Forbearance. Borrowers can postpone their student loan payments for three years if they become unemployed or if they provide proof of economic hardship. In deferment the government pays the interest on borrowers’ subsidized federal loans, but in forbearance borrowers are responsible for any interest that accrues on all of their federal student loans.

“Students may not fully appreciate just how much [deferment or forbearance] increases the size of the loans,” said Mark Kantrowitz, publisher of the financial aid website FinAid.org. “That’s why deferments and forbearances should mainly be used as a method to solve a temporary problem.”

Extend the terms. Graduates can extend the terms of their loans, thereby lowering their monthly payments, although in doing so they could ultimately pay double the interest what they would have originally paid. Graduates can switch back to their original loan terms at any time.

Income-based repayment. Beginning this July, eligible federal student loan borrowers can enroll in an income-based repayment plan that will limit their monthly loan payments to 15 percent of their discretionary income — income that is above 150 percent of the poverty line — and that will forgive borrowers’ remaining loan balances after 25 years of repayment.

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Changes to Student Loan Repayment Programs Not Enough, Advocates Say

Student Loan Girl — Thu, 30 Oct 2008 18:34:00 GMT

Despite 1,500 individuals and a dozen national organizations pushing for further changes to legislative provisions that help low-income college students repay their student loans, the Education Department recently issued the provisions’ final regulations without first making modifications to problematic language (“Low-Income Student Borrowers May Miss Some Intended Benefits,” The Chronicle of Higher Education, Oct. 26, 2008).

One issue involves the rules of a new student loan forgiveness program that would allow college graduates to have their federal loans forgiven in return for at least 10 years of public service in specific professions. Advocates of the program say that language in the program’s regulations fail to establish procedures that would inform college graduates ahead of time about which specific positions qualify for loan forgiveness.

Robert Shireman, executive director of The Project on Student Debt, a California-based advocacy group, believes that there may still be a way for the Department of Education to resolve this issue without having to backtrack through the regulatory process.

Education Department spokeswoman Samara Yudof, on the other hand, says that regulations for the loan forgiveness program “are clear, and provide a broad list of eligible occupations.” Department officials prefer to identify the eligible occupations in paperwork they give to applicants, instead of detailing the occupations within the regulations themselves, she says.

The other major regulatory issue creates a “double-counting penalty” for married couples under a new income-based repayment plan for student loans. If both partners are eligible for income-based repayment and they file joint income tax returns, supporters of the program say, the regulation’s language could be interpreted in such a way that the couple’s total joint income would be used to determine how much each spouse pays individually. This “double- counting” effect may require them to pay twice as much as two unmarried borrowers in similar financial circumstances.

“This is obviously unfair and inappropriate,” Shireman said, “and needs to be changed by Congress.” Yudof concedes that, in this case, Congress may need to take action to resolve the “double-counting” penalty problem.

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Medical Residents Losing Ability to Defer Student Loans for 'Economic Hardship'

Student Loan Girl — Tue, 10 Jun 2008 23:50:00 GMT

Beginning next year, medical school residents will no longer be eligible to defer their federal student loans because of new criteria the government will use to determine “economic hardship,” according to an article in the American Medical News (“New Rule Excludes Medical Graduates from Federal Loan Deferment Plan,” June 16, 2008).

An economic hardship deferment allows students with a high debt-to-income ratio to postpone their federal student loans for up to three years, during which time the government pays the interest on any subsidized student loans. According to the Association of American Medical Colleges, medical school students typically graduate with about $140,000 in college loans, $34,000 of which are subsidized loans.

Based on the new deferment eligibility criteria established by the U.S. Department of Education, a borrower’s debt-to-income ratio will no longer be taken into account. About two-thirds of medical school graduates qualified for deferment under the previous eligibility criteria.

The new definition of economic hardship, which takes effect July 1, 2009, only considers a borrower’s income for qualification, which is limited to $15,600 a year or less. Under the previous criteria, a medical resident making $45,000 and carrying at least $76,000 in debt generally qualified for economic hardship deferment.

To help students affected by the new rules, the Education Department will debut an income-based repayment program next July.

Medical residents, whose income is not over 150 percent above the poverty line for their family size, can have their loan payments capped at 15 percent of their income under the new program.

Once the government’s new criteria takes effect, a medical graduate who earns $45,000 — the average salary for first-year residents — would be required to make monthly payments of $365. As residents earn more money each year, their monthly payments would likely increase.

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