Paying Back Student Loans is Easier Than You Think

JAKE SHONKWILER — Few student loan borrowers are aware of the repayment options available to them. The Income-Based Repayment (IBR) and the Public Service Loan Forgiveness (PSLF) programs went into effect in 2009 as part of the College Cost Reduction and Access Act.   Borrowers who enroll in one of these programs will have their monthly payments capped relative to their income. These programs apply to federally funded direct student loans and federally guaranteed loans, but not to PLUS loans for parents or to private loans.  IBR and PSLF are best for student borrowers with high debt and low income, or for those who will be pursuing public service careers.

IBR adjusts loan payments to income. It does not depend on the total amount of debt or on work in public service. IBR caps monthly payments at 15% of your monthly discretionary income, where discretionary income is the difference between your adjusted gross income (AGI) and 150% of the federal poverty level that corresponds to your family size and the state in which you reside.  Thus, your monthly payments on your loans would be:

[(AGI – 150% Poverty Level) x 15%]/12 months

 IBR is based on the AGI during the prior tax year. The maximum repayment period is 25 years. After 25 years, any remaining debt will be discharged or forgiven.

In 2011, the Pay As You Earn plan took effect. This program is identical to IBR with two differences: (1) the monthly payments are lowered from 15% to 10% and (2) all remaining debt will be forgiven after 20 years instead of 25 years.  To qualify for Pay As You Earn, you must be a new borrower as of October 1, 2007, and must have received a disbursement of a Direct Loan on or after October 1, 2011.

A disadvantage to IBR and Pay As You Earn is that the amount of debt discharged is treated as taxable income. This means you are liable to pay income taxes on the amount of debt that is discharged in the final year you are in the program.

A borrower in the PSLF program can make reduced, income-based payments through the IBR or Pay As You Earn programs. Under PSLF, after only ten years of full-time employment in public service the borrower may qualify for forgiveness of covered unpaid loans.  Unlike the IBR or Pay As You Earn programs, income tax does not apply to the balance of unpaid loans forgiven.  The PSLF program requires that the borrower make 120 qualifying payments on a Federal Direct Loan and that the borrower works full-time for a public service entity as defined by the program. The 120 payments do not need to be consecutive within ten years but may be made over time.

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