Easing student loan repayments

College costs are out of control. Total outstanding student loans hover around $1 trillion, second only to home mortgages. Student loan repayment takes a hefty toll on starting salaries even during good economic times. But with so many recent graduates unable to find a decent job – or any job – repayment can be a nightmare.

You can’t walk away from student loan debt. It’s practically impossible to get it discharged through bankruptcy and there’s no statute of limitations on how long lenders can pursue you through collections. Indeed, the government can withhold tax refunds and garnish wages indefinitely.

The Obama administration recently accelerated improvements to a readily available, yet underused, student loan repayment plan called Income-Based Repayment (IBR) that had been slated to begin in 2014.

IBR is available for many federally guaranteed student loans and can be particularly beneficial for low-income families, the unemployed and people with lower-paying, “public service” jobs in education, government or non-profit organizations.

Under IBR, monthly payments are capped at an affordable level relative to your adjusted gross income, family size and state of residence. For example, if you earn less than 150 percent of the government’s poverty level for your family size, you would pay zero. You still owe the money, but are not required to begin making payments until your income increases. As your income increases, so will your monthly payment – but up to no more than 15 percent of income that exceeds that same 150 percent of poverty level.

In addition, the government will forgive debt still owed after 25 years of consistent repayment. And those with qualifying public service jobs must only repay for 10 years before the balance is discharged.

Under the recent IBR enhancements, for students who took out their first loan during or after 2008 and open at least one additional loan during or after 2012, the cap will drop from 15 to 10 percent and the forgiveness period drop to 20 years. Those with older loans can still benefit from the original IBR terms.

Other IBR features include:

• All Stafford, PLUS and Consolidation Loans made under either the Direct Loan program or the Federal Family Education Loan (FFEL) program qualify for IBR, except loans in default, Parent PLUS Loans or Consolidation Loans containing Parent PLUS Loans.
• You must submit updated income documentation each year. If your income rises, so will your payment amount, although never above what you’d otherwise pay under a standard 10-year repayment schedule.
• Because IBR will likely extend the term of your loan, you’ll probably accrue more interest than under a standard 10-year payoff.
• Private student loans don’t qualify for IBR.

Borrowers with two different types of federal loans – at least one each issued under the Direct Loan and FFEL programs – may consolidate their loans under a new Special Direct Consolidations Loans program between January 1, 2012, and June 30, 2012. This will lower FFEL loan rates by 0.25 percent, plus an additional 0.25 percent discount if you sign up for automatic payments. Visit www.studentaid.ed.gov/specialconsolidation for details.

If you expect your financial hardship to be temporary, other loan repayment options, including economic hardship deferment, forbearance and extended repayment, may be better options. For details, visit the Federal Student Aid site, www.studentaid.ed.gov and search “Postponing Repayment.” Other good resources include www.finaid.org and the Project on Student Debt (www.projectonstudentdebt.org).

Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney