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Know loan repayment options

If you have federal loans, you can make use of new government rules that give people a break on student loan payments they cannot afford.

Under the relatively new "income-based repayment" plan, you get relief if the regular payments you would have to make over 10 years will exceed about 15 percent of your discretionary income. That's calculated based on a formula related to the U.S. poverty line. Besides income, the calculation involves the size of your family.

Simply put, most borrowers will be required to pay less than 10 percent of their adjusted gross income, said publisher Mark Kantrowitz.

For a quick assessment, typically, if you owe more on your loans than you earn annually, you are a likely candidate for some relief. For married couples, both spouses can be eligible, depending on income. And the income requirements apply to Stafford, PLUS and consolidated federal student loans.

To see how you stand, try the online calculator available through a federal government's federal student aid website.

Based on the calculator, if you are single and earning $70,000 a year, you would be expected to pay $670 a month. Of course, you don't escape your obligations indefinitely. If you are getting relief and not paying all your interest each month, it gets tacked on to the end of the loan.

Thus, you might end up paying off your loan longer than the 10 years. But if after 25 years you still have not paid off all you owe, the government will forgive what's left. Also, if you happen to take a public service government job, you can get your loan forgiven.

Keep in mind that this program applies to federal student loans, not to private loans that you may get from a bank or other lender. So for people who have not yet finished college, this is one reason, before borrowing, to carefully consider who is giving you your loans and the rules that apply.

Also, it is wise to consider your likely salary before taking on significant debt. Look up your profession at It's painful to finish college and wonder how you will pay your loans. And paying interest for more than 10 years is expensive, even if your monthly payments are manageable.

To see if you might qualify for relief after graduating, call your lender and ask about the options for alternative payment plans, Kantrowitz said. If your lender doesn't offer any options based on your income, Kantrowitz said, you can go through a process called "consolidation."

Make sure you use the government's "direct loan program." This means you combine all your student loans into a new federal loan. You can then qualify for the income-based repayment plan. For information on consolidation, visit the Education Department's Federal Student Aid website.


For links to the websites cited in this article, go to the Strictly Business blog at