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 made 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 here, a 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 in 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. But under 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, ibrinfo.org here, contains 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 office at Federal Student Aid and 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 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, CA.  The Institute is a nonprofit organization funded by the likes of the Pew Charitable Trust and the William and Flora Hewlett Foundation.