Washington
Genevieve Grabman borrowed $85,000 to pay for law school at Georgetown University. Over the past six years, she has whittled her debt to $75,000, which is about equal to her annual salary as a policy adviser for two nonprofit groups.
On her current repayment schedule, she will still be paying off her student loans a quarter-century from now.
But Ms. Grabman, and many borrowers like her, is about to get some much-needed help.
The federal government’s new income-based repayment program, which takes effect Wednesday, allows borrowers to repay their loans as a percentage of their income, lowering payments for those with high debt-to-income ratios.
Under the plan, which was created as part of the 2007 College Cost Reduction and Access Act, a borrower’s monthly payment will be set at 15 percent of the person’s monthly disposable income. Borrowers who earn less than 150 percent of the federal poverty level will not have to pay anything on their loan debt until their income rises.
The plan also forgives a borrower’s outstanding debt after 25 years of on-time payments, or after 10 years for people in public-service jobs, like those in law-enforcement, teaching, and nonprofit positions.
For a single borrower who earns $75,000 per year and owes $85,000 in student loans, like Ms. Grabman did, the monthly payment would be $735.
The same borrower now would pay $978 per month under the federal government’s standard, 10-year repayment plan, according to debt calculators on the Education Department’s Web site.
As a general rule, borrowers who owe more in federal student loans than they earn in a year will benefit from the program, said Edie Irons, communications director for the Project on Student Debt, a nonprofit advocacy group.
Ms. Grabman said she expects her outstanding student debt to be forgiven in 10 years under the new program, because she plans to continue working in public-service jobs, a decision she says the income-based repayment plan helped her make.
“The idea is to provide an incentive for people to go into lower-paid but really important work,” said Ms. Grabman, a policy adviser for two nonprofit organizations that deal with women’s health.
The new plan caps a borrower’s maximum monthly payment at the amount the borrower would have paid per month under the standard, 10-year plan.
“It creates a graduated payment schedule that can go up and down with changes in the borrower’s income,” said Patricia M. Scherschel, a vice president at Sallie Mae, the nation’s largest student-loan company.
Not all federal loans can be repaid through the new income-based program. Loans that can be repaid based on income include Stafford Loans, Grad PLUS loans, and consolidated loans, awarded through either the federal direct-loan program or the federal guaranteed-loan program. Loans that borrowers cannot repay based on income include PLUS loans for parents and consolidated loans that repaid a PLUS loan for parents. Loans currently in default also do not qualify for income-based repayment.
Loans that qualify for the new program can be new or old and can be used to pay for any type of education, including job training and professional studies.
Student-loan borrowers will also benefit from another change that is to take effect Wednesday, when interest rates in several federal student-loan programs will drop to all-time lows. That will make it more attractive for borrowers to consolidate their debt and lock themselves in at the new variable rates—2.48 percent for Stafford Loans and 3.28 percent for PLUS loans.
These are the lowest rates in the history of the federal student-loan program, the result of the U.S. Federal Reserve slashing interest rates because of the financial crisis.
A Well-Timed Program
The federal government’s income-based plan comes at a time when the recession has forced many states to cut loan-forgiveness programs for graduates who pursue public-service careers. “The timing of this becoming effective is as good as it gets as far as meeting the need,” said Mark Kantrowitz, publisher of FinAid, a student-aid Web site.
“Lots of graduates out there would love to pursue a public-service career, but the financial realities put a stop to it,” he said. “This program makes it easier for people to pursue their dream.”
But there are downsides to the new program. The plan requires borrowers to submit their tax returns each year to their lenders so that lenders can recalculate monthly payments as borrowers’ incomes rise and fall. Also, any debt that is forgiven after 25 years under the new program is considered taxable income.
Several Congressional lawmakers are trying to change that through a House bill they have introduced to create a tax exemption for forgiven student debt.
“We don’t want to discourage participating in this program by taxing the amount that is forgiven,” said Rep. Sander Levin, a Democrat from Michigan who is the author of the bill. “The fact that [income-based repayment] becomes available to borrowers this week gives a sense of urgency to our efforts.”
Ms. Grabman, the Georgetown graduate, said she would probably earn double her current salary if she went into the private sector, a move she has considered because of her high monthly student-loan payments. But because of the forgiveness offered through the new repayment program, she believes she will be able to continue her career in public service while meeting other financial goals.
“Maybe someday I’ll be able to own a house,” she said.</P>
