President Obama’s revised repayment terms for student loans took effect in January, but doing the math on how much money both College undergrads and recent grads can save is quite a challenge.
Fortunately, there is a website that explains the complex formula and corresponding factors that could save a college graduate with high loan debt several hundreds of dollars – if not thousands — a year.
The term to keep in mind is “Income-Based Repayment Plan,” or IBR. The U.S Department of Education’s website is riddled with that term, and you may need it when speaking with a financial aid counselor.
Since the start of 2012, an estimated 6 million students and recent college graduates are able to consolidate their loans and reduce interest rates. The lower rates is based on 10 percent of a student’s discretionary income – that figure was previously at 15 percent. The plan also forgives the balance of their debt after 20 years of payments – instead of the previous 25-year term.
You may be eligible for the IBR if your federal student loan debt is high — relative to your income and family size, according to the government site.
The site provides an IBR calculator to estimate whether you are likely to qualify for the lower-rate plan. The calculator examines income, family size, and state of residence to calculate your IBR monthly payment amount.
The formula for figuring your IBR payment is based on your adjusted gross income (AGI), family size and the government’s pre-set poverty line. The IBR government website provides a convenient chart that takes into account the Department of Health and Human Services’ Poverty Guideline, established every January
The annual IBR repayment amount is 15 percent of the difference between your AGI and 150 percent of the Poverty Guideline for your family size and state. This amount is then divided by 12 to get the monthly IBR payment amount.. In 2010, the poverty line was $10,890 for a single person.
The Department of Education website gives this example: IBR repayment for a borrower with a family size of one (single) and an adjusted gross income of $30,000 would have a monthly repayment amount of $171 per month, based on a debt of $25, 000 when the loans entered repayment.
That amounts to a monthly discount of $174, compared to the month payment of $345 under a standard 10-year plan. The yearly savings: $2,088.
Among the many factors considered, the borrower’s monthly IBR proposed monthly payment must be higher than that calculated for a standard 10-year repayment plan to qualify for the IBR.
Here are advantages to the revised IBR plan:
- Your monthly payment will be less than the amount you would be required to pay under a 10-year standard repayment plan, and may be less than under other repayment plans.
- The government will pay your unpaid accrued interest on your Subsidized Stafford Loans — either Direct Loan or Federal Family Education Loan (FFEL) — for up to three consecutive years from the date you began repaying your loans under IBR.
- If you repay under the IBR plan for 20 years and meet certain other requirements, any remaining balance will be canceled.
- If you work in a public service job, your loan may be forgiven after 10 years, but this only applies to direct loans from the government and there are other stipulations.
Some possible disadvantages to the IBR plan:
- A reduced monthly payment generally extends your repayment period, so you may pay more total interest over the life of the loan than you would under other repayment plans.
- Your loan servicer needs updated information on your income and family size each year to re-set your payment amount. If you do not provide the documentation, your monthly payment amount will be the amount you would be required to pay under a 10-year standard repayment plan, based on the amount you owed when you began repaying under IBR.