College students are borrowing more to pay for their education than ever before. With a new income based repayment program, more students may find that they qualify for federal student loans, and are also better able to pay them off after graduation without fear of defaulting on their loan. The program may also help many students avoid the need to apply for private student loans.
With the new federal Income-Based Repayment program, the monthly loan payment is capped at an amount which is more affordable for most students and their families. The payment amount is based on annual income and the number of people in the household.
Even students with existing federal student loans may be able to take advantage of the program to help pay off current student loans. Under the repayment program, federal student loans which are eligible are Stafford loans, Grad PLUS loans, and most federal consolidation loans. Stafford loans are the main type of federal loan secured by most college students. Private student loans do not qualify for the loan repayment program.
Income-based repayment is best for borrowers who have a relatively high debt-to-income ratio, although borrowers with lower debt relative to their income may also benefit from the program.
Under the program, the repayment term is increased up to 25 years, which naturally increases the total interest paid over the life of the loan. Other than lower monthly payments, the upside is that after 25 years of making payments, the remaining loan balance will be completely forgiven, including interest. Borrowers entering public service fields, such as nursing, public interest law or nonprofit work, will see their debts forgiven after only 10 years of service and loan payments.
Before taking out a new federal student loan, make sure the loan qualifies for the Income-Based Repayment program. Students with existing student loans should contact the lender that collects their student loan payment to apply for the program.