Income-based loan repayment seems a novel idea, which President Obama is heavily pitching to give recent and upcoming college graduates a hand in paying off debt. However, the program has some caveats, as it doesn’t work for everyone.
Debt pile the size of Mount Everest
According to CNN, the typical graduate is estimated by the Institute for College Access and Services to graduate with $25,250 in student debts. More than $904 billion is owed on student loans nationwide. However, the White House is urging people to take part in a program the administration feels will help ease the burden.
In 2009, according to Time magazine, the Income-Based Repayment program was launched through the Department of Education. The program adjusts monthly payments to a percentage of income. Originally 15 percent, it was adjusted down to 10 percent in 2010, which remains in effect until 2014.
Not a smashing success
Borrowers apply for the repayment schedule through their creditors. Lenders assess the borrower’s discretionary income and create a new repayment schedule. Discretionary income, according to Fox Business, is defined as any income above 150 percent of the poverty line, or any income over $16,755 for a single-person household. Those below the poverty line don’t have to make payments.
The IBR extends payments out to 25 years after graduation, 15 years more than the typical repayment schedule. Remaining debts after 25 years are forgiven. However, people in public service, government or working for qualified non-profits are off the hook after 10 years of repayment.
As of February, according to Time, only 630,000 people had enrolled in the IBR. The White House, according to its blog, estimates up to 1.6 million people could benefit from taking advantage.
Not for everyone
The Department of Education has an IBR Calculator that can estimate, based on a persons’ income and loan amount, whether the program will benefit them. However, not every borrower would.
Firstly, the program extends payments to 25 years, instead of 10, which effectively raises the interest rate as more has to be paid over that time; paying the debt off in 10 years means 15 fewer years of payments.
Secondly, people who make more than a certain amount of money or have a sufficiently low debt level won’t benefit from the program. According to Fox Business, the Federal Education Budget Program, part of the New America Foundation think-tank, estimates anyone making $28,000 per year or more won’t benefit from the IBR, as they make enough money to cover typical payments.
The FEBP cites a Federal Reserve study that found the median debt, or the exact middle amount, of student debt is $12,800; the average debt of $23,300 in that study is, as averages are, offset by people with large debts from private colleges. A person with $12,000 in debt making $28,000 per year or more will only pay more under the IBR.
In short, a borrower with a reasonable debt and a reasonable income is better off paying as scheduled.
White House Blog: http://www.whitehouse.gov/blog/2012/06/07/income-based-repayment-everything-you-need-know
Department of Education IBR calculator: http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRCalc.jsp