For federal student loan borrowers, repaying loans has become more and more difficult with the increased costs of post-secondary education and the down-turn in the economy. Student loan debt is almost never dischargeable in bankruptcy, although there is a very narrow exception for undue hardship 11 U.S.C. §523(a) (8). The effect has been that many borrowers fall into default. The effects of default are serious including wage garnishment and income tax refund withholding by the IRS. Many students who are entering the workforce are unable to afford their student loan obligations even though they very much want to repay the educational debts.
As of July 1, 2009, student loan debtors may now opt for the Income-Based Repayment Program (IBR). IBR differs from income sensitive repayment programs in that it caps a debtor's monthly repayment at 15% of disposable income. Other programs offer graduated payments that do not take into consideration a person's ability to pay or a debtor's income availability. Upon 25 years of IBR payments, the remaining balance is forgiven.
The new IBR programs are a breath of fresh air for federal student loan borrowers. Some borrowers in the program may have monthly payment requirements of as low as zero since the payment plans are based on disposable income. These programs have strict guidelines for the determination of income.
Pros of the Income-Based Repayment Program (IBR)
Students struggling to make payments may now qualify for much lower monthly payments.
Students who are successful in the program may enjoy significant forgiveness of the balances of federal student loans at the end of a 25 year period.
Payment plans are based on individual income as opposed to a percentage of the loan balance and term of repayment
Cons of the Income-Based Repayment Program (IBR)
Currently, loan balances forgiven at the end of the 25 year period are subject to taxation but legislation in Congress may remedy this problem.
Payment plans are calculated based on loan balances when the student entered repayment as opposed to the current balance on loans; this is problematic for student borrowers whose loan balances have increased over time due to the accrual of interest. However, the Department of Education has agreed to fix this issue but the changes will not go into effect until July, 2010.
Do I Qualify For IBR?
Student borrowers may access IBR calculators by going to their respective student loan lender websites. A borrower must not be in default of their loan obligations. Loans must be federal in nature - private loans are not eligible for IBR. Students must certify their income on an annual basis for continued participation in IBR.
Helpful IBR Links:
If you are current on your loan obligations but are looking for more affordable ways of keeping your payments current, you should contact your student loan lender and inquire about IBR.