Everyone worries about deeply indebted college graduates with poor job prospects. Yet a program that helps those very borrowers, letting them repay their loans on the basis of how much they make, gets little attention.
For a few years now, the government has allowed borrowers whose federal student-loan debt is heavy relative to their income and family size to choose income-based repayment. In that program, they can make smaller monthly payments, and, if they meet certain conditions, the government even forgives their balances, eventually.
When the program began, in 2009, the timing seemed perfect. The economy had slumped, and student-debt levels were on the rise. Those concerns have only increased, but the program, despite its relevance, hasn’t become a household word.
In June the White House announced plans to improve the income-based repayment program, acknowledging what experts on student loans already knew: “Too few responsible borrowers are aware of their repayment options.”
Income-based repayment isn’t for everyone. Most of the 37 million borrowers with outstanding federal student loans are well served by other plans. And not all loans are eligible for the program. It’s best for borrowers who are hard pressed to make full standard payments because their student debt is high relative to their income. For example, a borrower with $30,000 in eligible federal loans with an interest rate of 6.8 percent would pay $345 a month under a standard 10-year repayment plan. If that borrower had an adjusted gross income of $30,000 and a family size of one, he would pay $166 a month under the current version of income-based repayment. Since the borrower’s monthly payment would be lower under income-based repayment, he would be eligible for the program. <Read more.>