Student loan program caps monthly payments

Published 9:35 pm Friday, July 16, 2010

NEW YORK — A program that caps student loan payments for those who earn modest salaries is now open to more borrowers.

Two groups in particular should take note: Married couples and anyone who has put off repayment through a deferment program.

The logistics are a bit complicated, so let’s start with some background.

The Education Department last year introduced a program called income-based repayment that caps monthly payments on federal student loans at 15 percent of the borrower’s income.

The idea is to keep debt loads manageable for those who don’t earn a lot. Eligibility is determined by weighing the borrowers’ income against the size of their monthly loan payment.

Who’s newly eligible

As of July 1, spouses may use their combined loan payments to calculate eligibility, so long as they file their taxes jointly. Previously, only the borrower’s loan balance was measured against total discretionary household income.

Borrowers now also have the option to use their current balance to calculate eligibility, rather than the amount they owed when they first entered repayment.

That means if your loan has been in deferment — and swelled because it continued accruing interest — you may be newly eligible. Borrowers can usually get deferments on payments for unemployment, military service or economic hardship.

To determine whether you’re eligible for IBR, check out the calculator at www.ibrinfo.org.

More on income-based payments

The program is available for most federal student loans, whether they’re direct loans or administered through private lenders. Parent PLUS loans, which parents take out to pay for their children’s education, are not eligible.

Besides capping monthly payments, the program forgives remaining balances after 25 years. Those working in public service could have loans forgiven after just 10 years.

Payments would never exceed 15 percent of any income above about $16,000 a year (150 percent of the poverty level). Those who earn less than $16,000 don’t have to make any monthly payments.

You may have also heard that the program will cap payments at 10 percent of income starting in 2014. But those improved terms will only apply to loans taken out after July 1, 2014.

Some caution

The income-based program keeps monthly payments at a reasonable portion of income by stretching repayment over a longer period. But if you’re paying off the loan sooner than 25 years anyway, the total cost of your loan would be higher.

That’s because you’d accrue more interest by stretching out payments, without qualifying for the loan forgiveness aspect of the program.

So if you can afford it, you’ll likely be better off paying off loans faster.

If a salary increase eventually disqualifies a borrower for the capped monthly payments, he or she would still be responsible for the cost of the loan and the interest that accrued up to that point. Monthly payments couldn’t exceed what they would be under a standard 10-year plan.

There are other options for those who can’t afford big monthly payments, such as long-term payment plans spanning up to 30 years. But eligibility requirements are stricter, and monthly payments can still be high.