The White Knight Of Student Loans: Income-Based Repayment
October 8, 2012

You may notice that Income-Based Repayment pops up in this blog time and again, and with good reason: it is the white knight for millions of Americans who are struggling with student debt. Beginning with low monthly payments and leading ultimately to loan forgiveness, it’s time we really gave Income-Based Repayment its due with a little showcasing. IBR was a fantastic option for students when it first became available in 2009 and with each passing policy adjustment it just keeps getting better.

Since it first became available to students, monthly IBR payments have been capped at 15% of the borrower’s discretionary income. For most people this comes out to less than 10% of their gross income. The assessment of discretionary income with this plan is based on the borrower’s actual income and family size, as opposed to other plans in which discretionary income is determined by the total amount borrowed. Plus, the monthly payments are adjusted annually in order to accommodate any shift in discretionary income. At the end of 25 years of on-time payments, the remaining balance of the loan is eligible for loan forgiveness. One crucially important thing for students to know when they are taking out their student loans is that only federal student loans are eligible for Income-Based Repayment; Parent PLUS loans and private student loans are ineligible.

But wait, there’s more good news. In 2010 an improved Income-Based Repayment plan was signed into law that is set to cap borrowers’ discretionary income at 10% instead of 15% after July 1, 2014. However, President Obama announced his intention to make the lower cap become available by the end of this year. This is expected to lower monthly payments for 1.6 million borrowers, not counting, of course, people who would benefit but have yet to switch over from other plans like Standard Repayment.

The biggest criticisms of IBR are 1) not enough people know about it and 2) it is too complex for student to navigate. Student aid advocates are working on a number of fronts to help with these problems and both are immensely fixable. One excellent resource are organizations that help students figure out how best to manage their debt and negotiate the complexities associated with optimized debt. Also, this past June a Presidential Memorandum was introduced, which is designed to make IBR easier to use and help get the word out. The Memorandum has streamlined the application process via an easy to use online application, which can be completed in one sitting and negates the need to go through a student loan servicer. In conjunction with this, the Department of Education is continuing to improve online and mobile resources for student loan repayment and debt management. Lastly, the PR focuses on improving awareness of Income-Based Repayment by directing the Department of Education to ensure that federal student loan servicers inform students about IBR before they take out loans. With this great plan in place and improvements always in the works, Income-Based Repayment is a stellar option for people struggling with student loan debt.

As kids we have a right to be taken care of; a right to rely on our parents to keep a watchful eye on our development. They make sure we eat right, they make sure we’re keeping up with the other kids in school. Parents are given so much information about how to nurture young kids: at what rate they should be developing and how to make sure they are healthy of mind and body. Parents spend their lives bestowing the fruits of these inquiries upon us. But we can’t rely on our parents forever. College is exactly the time to become more self reliant, which means we need new resources to help with solving our more grown up problems, like how to navigate the complexities of personal finance.