Steve Klingaman

Steve Klingaman
Minneapolis, Minnesota,
January 01
Steve Klingaman is a nonprofit development consultant and nonfiction writer specializing in personal finance and public policy. His music reviews can be found at

Editor’s Pick
JULY 30, 2009 10:18AM

Finally! Student Loan Debt Relief Arrives for Many

Rate: 11 Flag

A million grads could benefit     

   Paying back student loans is one of life’s inevitabilities, like death and taxes. Over the past fifteen years, the burden of financing a college education has fallen more and more onto the backs of students, through federal and private student loan programs.  Finally, one group, low-income college graduates facing large federal loan debts, can expect some relief.

            According to Edie Irons, Communications Director at The Project on Student Debt, as many as a million college graduates with big debt balances can expect relief under the new federal Income-Based Repayment (IBR) Plan.  The enabling legislation went into effect on July 1.  If all goes according to plan, it should help to stem a rising default rate on student loans.

            The Income-Based Repayment plan works by identifying the existence of what the plan refers to as partial financial hardship on the part of a borrower.  Where such hardship exists, IBR caps monthly loan payments at no more than 10 percent of gross income.  In addition, unpaid balances including interest can be forgiven after 25 years.  

            IBR covers most types of federal loans made to students, including the Direct and Guaranteed loan programs.  The plan covers loans received directly from the federal government as well as those made by private companies like Sallie Mae or Citibank.  It does not cover loans obtained by parents.  

            Under the old regime, getting out from under oppressive levels of college debt was nearly impossible, even under bankruptcy.  According to Ms. Irons, this law is the real deal, reform you can count on.  She should know.  The Project on Student Debt developed the model legislation that served as the bones of IBR.  The Project is home to some world-class policy wonks who just happened to have the good timing to develop the initiative on the cusp of a new deal in Washington.  The law stands as solid evidence that help is on the way for at least one class of debt-ridden consumers.

            Why is the passage of this law so amazing?  It got past the banking lobby.  Though hybrids like Sallie Mae administer these loans, Citibank is a huge player in this market, and banks like it stand to lose big bucks.

Calculate a Financial Cure

            According to the convenient debt calculator found on the IBR website herea college graduate with a $25,000 loan bill who earns $20,000 would pay just $50 a month under the plan.  The loan amount used for the calculation is the balance at the start of the prepayment period.  The monthly repayment amount automatically resets each year depending on the income of the borrower. “When you apply for IBR you give your lender permission to check your income from your adjusted gross income from your taxes every year,” said Ms. Irons.

             “There are people who might save hundreds of dollars a month.  Other people might save fifty dollars a month,” according to Ms. Irons.  She went so far as to venture that some people might pay nothing for as long as their income remains at very low levels, saying, “For a single person with an income below about $16,000 a year, their monthly payment would be zero.”  Working as a barista, that is not so hard to accomplish.

            The loan relief program provides temporary relief to those who face a slow career rise.  It may provide permanent relief to those who engage in careers the rewards of which materialize in denominations other than dollars.  In fact, workers in public schools, colleges, hospitals, or nonprofit organizations qualify for even greater relief.  The Pubic Service Loan Forgiveness program, a component of the IBR law, can provide debt forgiveness in as few as 10 years.  One almost has to pinch oneself.

            Nevertheless, most, or at least a great many participants will ultimately earn enough that they will pay off the loan before they reach the 25-year threshold.  (Obviously, those qualifying for the 10-year threshold are in a far more advantageous position in relation to loan forgiveness.)  But even for those who will pay off the entire loan over time, this program provides critical relief during the early, lower-income years.  And for those whose loans drag on and on, they may qualify later in life due to reduced circumstances caused by an illness or divorce.

            Still, the program is no free lunch.  As income rises, deferred interest is recapitalized into the loan balance.  This increases the total cost of the loan for those who do not qualify for loan forgiveness.  This part of the arrangement is similar to the way repayment was structured under the old graduated payment option.  Reconfigured payments, however, can never exceed an amount equal to those of the Standard Repayment Plan.  This is the number that usually knocks new graduates for a loop. With IBR, they may not see payments at that level until years after they have embarked on careers.

Want Details? (There are Many)  Check the Website

            A website developed by The Project, herecontains a wealth of information on all aspects of the relief program, including how to apply.  “It should be pretty easy,” says Ms. Irons. She cautions, however, that the law is still in an early stage of implementation and there are a few kinks to be worked out regarding eligibility guidelines.

            Another kink is that some would-be participants who need to contact private lenders in order to apply are being actively discouraged from participating by representatives of the lending banks.  Borrowers encountering undue hassles should contact the ombudsman's office at Federal Student Aid as well as The Project on Student Debt.

            IBR is not designed for all cases of hardship.  Ms. Irons counseled that those who are temporarily unemployed or looking for a job might simply seek a deferment, an option that has been around for quite a while.

            Under current tax law, forgiven debts are treated as taxable income.  The Project on Student Debt is working to exempt loan cancellations granted under IBR from taxation as income. The House will consider this change as part of a bill known as HR2492.  The Project is currently seeking public support for this bill. You can find more information on the campaign here.

Who said policy wonks aren’t change agents?

            If there is a greater lesson here, it might be that gifted policy experts working outside of government can sometimes provide blueprints to new solutions.  Take health care reform:  kindred policy experts have been working for years, outside of a partisan context, to supply legislators with new models.  But on the health care score, Congress has had its fingers in its ears.  When it listens to others than the Gucci-shoed dudes of K Street, Congress can sometimes be led to water, and even be made to drink.  Kudos to The Project on Student Debt for making sausage-making look like a civics class project.

            The Project on Student Debt is a project of the Institute for College Access & Success, based in Berkeley, California.  The Institute is a nonprofit organization funded by leading foundations like the Pew Charitable Trust and the William and Flora Hewlett Foundation.

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Thanks for this. The topic f student loans is way-way-way too complicated for me to figure. I can't balance a checkbook ot remember my VAMC shrink date.
I tried to research the student loan "rip off" when I first began fiddling with the gadget-contraption. I remember sensing the poor student would have to move to India and get a green-visa-permit to work as a telecom shoe sales-person. How many farm boots should one own ay 29% interest rate? The Student Debt is cruel, unfair, and merciless. I don't have a student loan debt. My son, his wife, and many young people I know have a huge debt that follows them to the grave.
Then, I'm told that when a Capital Hill member TWERP calls a call-pimp-service for a cheap thrill ... The American taxpayer picks up the tab for HARLOTRY fees. I was told that by a former Capital Hell Women yesterday in DC.
I am just repeating anonymous a inner beltway reliable sources who once worked for those creepy politicians. 'Um are thieves and vulgar vultures that hover in the shyster hallways on the hill. [e].
I'll e- mail this to help inform young folk who carry the sad yoke.
Thanks for this. I've sent it along to my favorite in-debt grad student.
Income-based help sounds good, except when it doesn't work. If I make 2,000 before taxes, then 10% of my income is $200. They don't take into account your rent, car payments, bills, and food expenses. I know that I can't afford $200 monthly to pay student loans. That's what sucks.
Gwendolyn, sorry, do you mean $2,000 a month or (via typo) $20,000 a year?
My understanding is that this is only for Stafford-type loans and not for private education loans.
As excerpted from the IBR website here:

IBR can help you if:
You have federal student loans in either the Direct or Guaranteed (FFEL) Loan program.
Your loans include Stafford, Grad Plus, and federal Consolidation loans that do not include Parent PLUS loans. Perkins loans are eligible if you consolidate them into a federal Guaranteed (FFEL) or Direct loan.
You borrowed before or after IBR was created, for either graduate or undergraduate study.

IBR is not available for:
Private (or "alternative") student loans, state loans, and other loans not guaranteed by the federal government.
The colleges have combined with the financiers to crush a whole generation. This can only help go in a better direction.rated
I recently got a letter lowering the interest rate on my student loan. It was 3.5% before and now it's 3.0%. I have no idea why. But I assumed it had something to do with the stimulus package. At the same monthly payment, it will mean my loan will pay off about 4 years sooner. I have no objection, but neither did I ask for this.
I am sick and tired of people trying to get out of paying their student loans. You borrowed it. Pay it back.
As I noted and Jon Henner reinforced, IBR offers no relief to private loan holders. Private loans have grown to be a much larger percentage of college loans. According to the College Board survey, Trends in Student Aid (2007), private loans as a percentage of the total funding picture grew by 989% over 10 years.

No is trying to get out of paying their loans. Half of the loans you are offered are government loans, the rest are unsubsidized. The government loans don't charge interest while you are in school, while the others do. If your tuition is $8000/year, you will be offered $4000 in private loans, $4000 in government loans. There is no other option, so either you take the loans and go to school, or you don't.

School loans typically run at 8-10%, which is a huge burden. None of mine were offered at less than 8.5% and I took out my first loan in 1992 and my last one in 2005 (I'm in grad school now). My loan undergraduate unsubsidized loan debt has doubled from $40K to $80K. I don't know of any savings account, t-note/bill/bond or cd that could give you that kind of return.

The loan industry is a out of control. Consider that the highest CD rate you can get is 1.75%, yet credit cards go as high as 30% and school loans as high as 10%. It's a racket that preys on those who are in need. If it was reasonable, then everyone would be able to pay it off, but that isn't what the loan companies want - they make more money off of interest than you paying off your debt and they use it to make their books look good.
I am glad something resembling reform is finally being offered. It's sick that college students were being given student loans at what is often usuary rates. The price on those wanting and education in order to get ahead often meant incurring debts which placed them substantially behind.
Thank you, Thank you! This is so timely for me as I have two college graduates this year - one is in education and looking for work, the other is going to grad school in Marriage and Family Therapy. Both of them had jobs in high school and throughout college. I have been worried about how burdensome their debt load may be!

Warning: blogwhoring about to happen:

Thank you again. You have a great way of breaking down information for the average Jane.
Thank you very much for this Steve. I'm going to start wonking around the The Project on Student Debt site and might stop back by with some more questions. Thanks a million for posting this though. You. Da. Man.
Interesting. Thanks for the info and for the IBR link.
Jennifer, thanks for your comment, and for reminding us that in some other countries, apparently student loans are not subsidized at all. Unfortunately, here the the greatest growth in student loans has come in the private, unsubsidized categories, where interest accrues from the day the loan is taken out and rates are high given the payoff period of the loans.

Still, the law makes it quite clear, paying back a loan is an inevitability, except that now we have expanded debt relief within the rules. The more flexible guidelines are designed to prevent the default rate from soaring in hard times. That helps all borrowers.
One of the commentators says "you borrow it, you pay it." Sure, it is your responsibility to pay of your debt, but with what is happening to our economy now, that is so much easier said than done. Needless to say, the recession has left millions of people out of work, so do we expect fresh college graduates to find a good paying job that will help ease the burden of student loans in an economy we are facing now? They need some form of student loan debt relief one way or the other. It would be so sad that their debts would crush their financial future even before they officially reach adulthood without any debt help.

credit card debt forgiveness
The article states: "IBR covers most types of federal loans made to students, including the Direct and Guaranteed loan programs. The plan covers loans received directly from the federal government as well as those made by private companies like Sallie Mae or Citibank. " Then, later comments on the blog state that private loans are not included. I'm confused. Is SallieMae included in IBR or not?
The plan covers Guaranteed loans made by private banks, but not strictly private loans that are not part of the federal Guaranteed program.

Sallie Mae is included.
What would truly be helpful is for legislation to be passed that would address the tendency of private loan companies to set up students for failure/default. I've been successful in avoiding this, but I don't think students are fully prepared for the amount of time it takes to pay off this debt and all of the knowledge needed to do so successfully.