It’s the beginning of the school year, but those who have recently graduated are about to get a reminder of last year—and all the other years before that: student loan payments! If you’ve borrowed from the federal government using the Direct Stafford Loan program (the most common lending program that graduate students use), you have a six-month grace period between the time of graduation and when your first loan payment is due. Since you probably graduated at the end of April or beginning of May, you’ve probably got about six weeks before you start paying for that education.
Hopefully you’ve got a job and meeting your loan obligations won’t be too difficult. But if you’re like many recent graduates, you might have had a hard time finding a job in academia or in any other sector of the economy. You could be working as an adjunct or lecturer this year as you prepare for a run at the job market now that you have your degree in hand; but these jobs notoriously pay very little. (This, of course, does not prevent you from making adjuncting fulfilling.) And even if you have a tenure-track job, there isn’t always a guarantee that you’ll be in the best position to begin paying back your loans. After all, you probably just moved from where you had been living to wherever your new institution is located. Your first paycheck might not even arrive until the end of September. You’ve probably begun hacking your cash flow with personal finance software, but that doesn’t mean that it will be easy to find what’s required to pay these loans.
With all of this in mind, I want to mention a program that the federal government put in place last year that has made the repayment of my loans much simpler and that may very well help you as well. The Income-Based Repayment (IBR) Plan was first offered in July 2009 and is, according to the Federal Student Aid website, “intended to be affordable based on your income and family size.” In other words, instead of building a repayment plan on the one-size-fits-all, 10-year schedule that is standard for student loans, the government will look at your particular situation to determine what you will repay. What a novel concept!
Before I get into the details, a couple of caveats are of course due. First, this advice is naturally intended for those in the US educational system. Second, I am not a lawyer; nor am I a financial planner nor a finanical aid officer/guru. Apart from the Federal Student Aid Website, your best contact for information will be your own loan servicers. That being said, I’ve discovered that not as many people have heard of this program as it applies to.
Income-Based Repayment in 7 Bullet Points
- You will qualify for IBR if your debt is high relative to your income and/or your family size. Don’t think, in other words, that being a single person means you won’t be eligible for the program.
- Under IBR, your monthly payments will be determined by your income and family size, instead of being determined by both what you owe and a set timeline for repayment.
- To apply for the program, you will have to verify your income and family size with your loan servicer. In short, this means you will send them a few pages from your most recently filed federal tax return on a yearly basis.
- Since you pay according to your income rather than a set window of time for repayment, additional interest may accrue on your loans. However, the federal government will pay the interest on Subsidized Stafford Loans for up to three years when you enter the program. This means that participation in the program costs you nothing for the first three years.
- Also, since you pay according to your income rather than a set window of time for repayment, it may take you longer to repay your loans. The end result of this is that you might pay more in interest than you would otherwise. (This is the possible downside of IBR.)
- However, if you are in the IBR program for 25 years and you have still not finished paying off your loans (remember, you pay according to your income rather than what you owe), then your remaining balance will be canceled!
- Also, if you work in “public service” and meet other conditions, your loans could be forgiven after 10 years of monthly payments. And yes, public universities appear to count as “public service.” (For more, see this Federal Student Aid “Loan Forgiveness for Public Service Employees” fact sheet [PDF].)
Believe it or not, seven bullet points is about all you need to explain this federal program. And it’s one that can make a tremendous difference in your life.
To give you an example, before I started the program, my monthly loan payments (on a 20-year repayment plan due to consolidation) was right around $400. I applied for the IBR program as soon as it became available. The application consisted of one simple sheet from my loan servicer to which I stapled the first two pages of my 1040. In two weeks, I was approved and my monthly payments dropped to a single digit. A nice round one. This year, I received an even simpler sheet from my loan servicer, to which I attached the same two pages of my most recent 1040, and I was approved again in two weeks’ time.
It of course bears mentioning that my family situation (I’m married with three children) and my income in 2009 (I was an adjunct) influenced what the government determined I was able to pay. I anticipate my own payments will change in the coming year as my current job pays more than the last two I’ve had. Your situation will obviously be different. But you can get a sense of whether or not you’d qualify for the program by using the government’s IBR Calculator.
If you reduce your monthly payments, you can still pay more so as to lower your overall debt level. There is no pre-payment penalty. Or you could contribute more to your (retirement) savings, allowing you to pay yourself, something that is always ProfHacker-approved.
Are you using IBR and if so, how has your experience been? What other tips do you have for hacking away at your student loans?
[Image by Flickr user stuartpilbrow / Creative Commons licensed]
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8 Responses to Hacking (Away at) your Student Loans: Income-Based Repayment
katypearce - September 7, 2010 at 11:21 am
What’s the difference between the Income Based Repayment (IBR) Plan and the Income Contingent Repayment Plan ?
briancroxall - September 7, 2010 at 11:29 am
@katypearce As I understand it from the descriptions provided by the government, the Income Contingent Repayment plan is something that you sign up for long term, whereas the IBR plan is designed for partial financial hardships, allowing you to move in and out of the program, depending on your income.
jclarsen - September 7, 2010 at 11:44 am
Also good to note, most private schools are also eligible for the 10 yr rule since they operate as non-profit institutions. Essentially, if you make qualifying payments while working at almost any HEI, you will be able to get the pay 10 yrs then forgiven benefit.
dobbsart - September 8, 2010 at 9:10 am
No, no, no. The IBR program is essentially a scam designed to get you to extend your repayment–if at any point you are making enough income to be deemed ineligible for the program, your interest rates and monthly payments will skyrocket. My wife enrolled in the program (we both have student loans, but hers came due sooner than mine) after we had our first child, when I was still a graduate student and our income was virtually nothing. Our monthly payment, which had been in the neighborhood of $250/month, was deemed to be zero. However, after a couple of months, we started to get suspicious, asked more questions, and were informed that if I got a job out of graduate school and we started having an income, the accumulated interest during the time we were paying nothing would result in over $400/month payments. Yes, the 25-year-rule still applies, but who plans to make very little income for 25 years out of school? This plan is only good for the most unfortunate, and is, like most things related to U.S. student loan financing, a scheme destroying the last vestiges of the middle class in this country and designed to separate the average worker from his or her paycheck dollars and deposit them into the pockets of large corporations.
atana09 - September 8, 2010 at 9:36 am
True that the student loan situation has been quite detrimental to the stability of the American middle class. And if the corporate lenders would actually be required to actually pay back the billions that they have stolen under the 9.6 scandal its very probable that it could be redirected to debt forgiveness for this morally odious & deliberately impossible form of debt. However that solution seems quite unlikely to happen. As far as the IBR program being based upon and mainly beneficial for the desperate and those who’d be low income for a long time, partially true. However since the middle class has not had a real increase in income since approx 1975 (2009-2010 CIA Worldbook-USA) this program may actually fit a greater number of American’s than we’d care to admit. A few years ago the NEA published an article ‘My debt My Life” which indicated how ruinous the whole situation was for their cadre. Yes, the IBR program is a compromise and one which at times seems less than ideal especially since it does not really address the problems caused by corporate educational loans (often set under terms which would make the worst of the De Medici’s or Satan envious) and does little to restore consumer protections. However the mere fact it was established and continues to exist is quite remarkable. Within president Obama’s administration there are people, namely Geithner and Summer’s who have made public pronouncements which have no sympathy for the generation caught in the edudebt trap, and more than a little obvious support for the educational lending industry and all its unholy permutations. And with GOP the alignment with the lenders is so pervasive that any light getting into the lenders pockets wherein they reside is very improbable. So yes the IBR is a flawed program, and largely what it does is delay the national reckoning over student debt (580+ billion, massively over leveraged and exploding) but for many this temporary refuge is better than facing immediate ruin. Basically IBR is a imperfect harbor during a financial storm. Now if academe could wean itself away from the debt based model for student financing, perhaps there need not be another financial lost generation as a result of education. And those of us who are profs could cease trying to morally reconcile our desire to teach and serve with a system which seems little more than thinly veneered educational sharecropping.
mush9902 - September 8, 2010 at 11:36 am
Re: atana09Right on.
mdgill - September 10, 2010 at 8:54 am
I think it is reasonable to expect a person to repay 10-15% of their income, even if the absolute value of that payment is high, and it is not reasonable to call IBR a scam. Hopefully, IBR will not become another hidden repayment alternative like ICR.In my own blog (http://michaelgill1969.blogspot.com/2010/08/student-financial-aid-why.html), I am trying to make the point that student loans are not loans, but grants.
drrom - September 12, 2010 at 12:16 pm
So, I’ve checked into IBR and loan forgiveness for working at a public university. I’ve got a consolidated Direct Loan so I’m paying back Uncle Sam and not [insert big bank here]. Uncle Sam says that I have to pay 20% of my monthly income in order to qualify for the 10-year repayment – loan forgiveness plan. 20% in my geographical location for a single person is untenable. I would then have to choose between paying for groceries or paying all of my rent. Talk to someone on the phone rather than relying on all of the online materials.