Ever heard of income based repayment options? It’s an option that college students have, but a new study suggests few know about it – and that’s a problem considering the increasing number of college students, both in school and graduated, who are struggling to meet their financial obligations. Here’s how it works and if you’re eligible.
With so many college students struggling with repaying their student loans, along with the still increasing number of students with high credit card debt, any advantage is one families are considering – and IBR is definitely within reach for many, if not most, of these families.
One reason this is so important is because of a statement made by the Federal Reserve this week: student loan debt has been cited as a major risk to the spending power of Americans. Student loans are now the biggest non mortgage debt – and they surpassed credit card debt late last year. The numbers continue to climb and now, the total amount owed on student loans is at a staggering $1.1 trillion, according to CFPB.
So what is IBR and how can it help?
Early last year, the Obama Administration made available better repayment options for college students and their families. So far, just 1.6 million applications have been received and of those, close to 70% were approved and are now enrolled. Another 20% are awaiting their reviews. That means the vast majority are eligible, according to the Department of Education.
In most instances, IBR plans will reduce monthly payments to assist Americans as they seek ways of making their debt more bearable. The one big requirement is the presence of a financial hardship. Again, that’s not hard to find in American households, especially for those carrying other debt and who are struggling to find jobs at all, much less those where they can make use of their degrees.
Here are a few of the other requirements, aside from the financial hardship that must be present, set forth by the Department of Education:
If your first student loan was taken out prior to Oct. 1, 2007, you’ll want to pursue the older IBR — which provides, if approved, for a 25 year repayment period. Most importantly, it caps a borrower’s monthly payments at 15 percent of his or her discretionary income.
If, however, your first student loan was taken out after that date, the new revised IBR is what you’ll want to seek out. This provides for a 20 year repayment period and caps a borrower’s monthly payments at 10 percent of discretionary income.
Interestingly enough, this is part of the 2010 Health Care and Education Reconciliation Act. What makes it interesting is that few people are even aware of this new law.
Along with the specifications outlined above, the following loan structures are eligible for one or the other IBR plan:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans made to graduate or professional students
- Direct Consolidation Loans without underlying PLUS loans made to parents
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- FFEL PLUS Loans made to graduate or professional students
- FFEL Consolidation Loans without underlying PLUS loans made to parents
There are loans that are ineligible are few but include PLUS loans made to parents; consolidation loans that include underlying PLUS loans made to parents; and private education loans.
The bottom line, however, is that students and their families who can ease the financial burdens they are now shouldering, which will allow them to pay down credit card debt. With student loan debt now the biggest burden on consumers, the opportunity to ease it to some degree can also mean better opportunities to pay off their totals a lot sooner, which means lower interest rates.
For those with private student loans, the IBR program isn’t available; however, there could be new options for those with private loans. The Consumer Financial Protection Bureau is working with banks and other financial entities to develop new repaying options. The government watchdog group refers to these as “hard to manage debts”.
Not the Same Loans as Before
Indeed they are. They’re often now allowed in bankruptcy filings and the collections agencies that take the overdue debt can be relentless. The time has definitely come for better options for consumers who went into these loans with good faith, but who faced hardships, often because they dropped out of college because of the rising costs and for those who did graduate, many found themselves with no jobs to enter into and therefore are working at lower paid jobs that can’t handle that kind of debt – even they’re even able to find jobs at all. Families who took on the debt often thought it would play out the same way it did with them and their parents years ago. Mom and Dad carried the burden until they graduated and found jobs. At that time, most began taking on the remaining debt balances. That just isn’t happening these days. In fact, it’s not unusual at all for both the parents and their college students to be un- or underemployed.
The unemployment rates are still high across the country and with the summer quickly approaching, there exists the possibility for an even tighter job market as younger people seek out the part time positions, what few there are, to help them cover their expenses while they are out of school.
The CFPB has found recently that borrowers who carried these types loans to private student-loan providers face significantly higher payments and often lack alternative repayment and refinance options. In October 2012, the CFPB released a report finding that consumers had trouble negotiating affordable repayment plans with their lenders and servicers for private student loans – loans that are not designed with income-based payment options.
What do you think? Should there be extended repayment periods for those carrying student loan debt? If you’re carrying these heavy burdens, are you or would you consider an IBR repayment plan? Let us hear from you. Join the conversation in our comments or on Facebook.