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Hope for grads deep in debt

Updated: May 3, 2013 12:14PM



College students are graduating into an ocean of debt, with limited job prospects. How will they ever repay those student loans, which average $22,000 -- but could be much more than $100,000? The idea that a college degree will pay for itself is wearing thin, as new grads face the most dismal hiring market in decades.

Starting July 1, there will be new help for recent grads -- or those who have been out of school for a while and are struggling to repay student loans. The new federal Income-Based Repayment program will allow those with low incomes to pay as little as zero on their student loans, as long as they qualify based on income and amount of debt.

The rules are a bit complicated, but basically if you owe more on student loans than you earn in a year, you will probably qualify.

Details can be found at www .IBRinfo.org.

Income qualifications

Basically, any income greater than 150 percent of the federal poverty level is considered "discretionary income" for purposes of this program. And no more than 15 percent of your discretionary income will go to student loan payments. (That poverty level differs depending on your family size.) For example, the 150 percent figure for a single person would be $16,245 in the continental United States, higher in Alaska and Hawaii.

If you make less than 150 percent of the poverty level (and therefore have no discretionary income to put toward loan payments), your IBR payment on your student loans would be zero. Above that level, your required monthly payments would be calculated on a sliding scale. For example, the traditional 10-year standard repayment might call for a $350-a-month payment on a $30,000 debt. But under the Income-Based Repayment program, the same person with a $30,000 income would pay only $170 a month.

If your payments are zero, or so low that they do not cover even the interest on your loan, then the unpaid interest will accrue on the loan balance. But unlike traditional deferral programs in case of hardship, the interest does not compound. In other words, interest will not be charged on interest.

After 25 years of payments, any remaining balance will be forgiven. And there's a special deal for those who go into qualifying public service professions. Their loan balances will be forgiven after 10 years.

What to do

After checking out the details of this program, and using the online calculator at the Web site to estimate your payment, you'll want to start the process. Applications will be available July 1. (And while you can check your eligibility, the Internal Revenue Service will verify if you qualify based on last year's income.)

You'll probably want to consolidate all of your fixed-rate federal student loans, which mostly carry a 6.8 percent rate for the life of the loan. (The only exception would be for the older -- pre-2006 -- variable rate loans. Those may qualify for a very low rate starting in July, under the consolidation rate set by Treasury auctions.) Go to www.loan consolidation.ed.gov to learn about student loan consolidation through the federal government.

Then learn about the Income-Based Repayment plan for all of your federal student loans. Even if you have older, consolidated loans but cannot afford the payments because you have lost your job, you may qualify based on your current income. For older loans, the new lower payments will be based on the amount of your loan when you entered repayment.

Even if you've defaulted on your student loans, you might be able to get into this plan -- after your loan is rehabilitated! And since student loans are not erased by bankruptcy, this might be your best chance to deal with the payment issue.

Yes, the government knows this is complicated, and it is still a work in progress. The idea is to remove the burden of student loan repayments for those who have little income and/or big student loan debt. And the program is also designed to encourage graduates to go into public service.

Student loans stay with you for a lifetime, since they can't be wiped out by bankruptcy. Eventually your education will help you land a better job to make repayment easier. But if you are struggling with student loan repayments, either because you're just graduating and don't have a job, or because you've lost your job, this new program is designed to lift some of your burden. And that's The Savage Truth.

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.



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