College costs are out of control. Total outstanding student loans hover around $1 trillion, second only to home mortgages. Student loan repayment takes a hefty toll on starting salaries even during good economic times. But with so many recent graduates unable to find a decent job — or any job — repayment can be a nightmare.
You can’t walk away from student loan debt. It’s practically impossible to get it discharged through bankruptcy and there’s no statute of limitations on how long lenders can pursue you through collections. Indeed, the government can withhold tax refunds and garnish wages indefinitely.
The Obama administration recently accelerated improvements to a readily available, yet underused, student loan repayment plan called Income-Based Repayment (IBR) that had been slated to begin in 2014.
IBR is available for many federally guaranteed student loans and can be particularly beneficial for low-income families, the unemployed and people with lower-paying, “public service” jobs in education, government or nonprofit organizations.
Under IBR, monthly payments are capped at an affordable level relative to your adjusted gross income, family size and state of residence. For example, if you earn less than 150 percent of the government’s poverty level for your family size, you would pay zero. You still owe the money, but are not required to begin making payments until your income increases. As your income increases, so will your monthly payment — but up to no more than 15 percent of income that exceeds that same 150 percent of poverty level.
In addition, the government will forgive debt still owed after 25 years of consistent repayment. And those with qualifying public service jobs must only repay for 10 years before the balance is discharged.
Under the recent IBR enhancements, for students who took out their first loan during or after 2008 and open at least one additional loan during or after 2012, the cap will drop from 15 to 10 percent and the forgiveness period drop to 20 years. Those with older loans can still benefit from the original IBR terms.
If you expect your financial hardship to be temporary, other loan repayment options, including economic hardship deferment, forbearance and extended repayment, may be better options.
For details, visit the Federal Student Aid site, www.studentaid.ed.gov and search “Postponing Repayment.”
Other good resources include www.finaid.org and the Project on Student Debt (www.projectonstudentdebt.org).
Alderman directs Visa’s financial education programs.