Getting Help to Repay Student Loans
by: Iowa Legal Aid
People who owe money for student loans may get help from a new law passed by the federal government. The law has three main parts:
- An "Income-Based Repayment" option for federally-backed student loans such as Stafford loans;
- Forgiving federal student loans for people who work in public interest jobs; and
- Lowering how much interest people must pay on new federally- backed student loans.
What Is "Income-Based Repayment?"
"Income-Based Repayment" means basing student loan payments on the person's family income. This is an option for student loans made directly by the federal government, like Federal Direct Stafford Loans.
Must all lenders offer payment plans based on family income?
Private lenders do not need to offer this option, even if they offer Stafford loans. If your student loan lender does not offer an Income-Based Repayment plan, you may be able to refinance your student loans. The federal government is going to offer Federal Direct Consolidation loans to people with Stafford and other federally-backed student loans whose lenders don't offer Income-Based Repayment.
Isn't there already a way to have payments for student loans based on income?
At this time, the federal government does offer an Income Contingent Repayment plan. Under this plan, a person pays 20% of their income over 100% of the federal poverty level. The Income-Based Repayment plan offers even lower payments. Under Income-Based Repayment, student loan payments will be no more than fifteen percent (15%) of the person's "disposable income." Disposable income is income above 150% of the federal poverty level. For a family of four, 150% of the federal poverty level is $31,800.
Example 1: If your family income is less than 150% of the federal poverty level ($31,800 for a family of four), you will not have to make student loan payments under an Income-Based Repayment plan.
Example 2: If your family income is $1,000 more per month than 150% of the federal poverty level (a total of $43,800 yearly for a family of four), your monthly student loan payments would be no more than $150.
Can reduced payments now mean changes in the loan terms later?
With an Income-Based Repayment plan, your monthly payments may be less than the amount of interest due on the loan. For the first three years of an Income-Based Repayment Plan, the federal government will repay or forgive whatever interest remains unpaid under an Income-Based Repayment plan. After the first three years of an Income-Based Repayment plan, whatever interest is not covered by your monthly student loan payments will be added to the total amount you owe on student loans. This means the amount of money you owe on your student loans may actually increase over time with the Income-Based Repayment plan. This could mean higher student loan payments in the future. This could also result in a significantly longer repayment schedule.
How Long Do These Repayment Plans Last?
An Income-Based Repayment plan can last up to twenty years. If your income goes up, you may be moved to a standard repayment plan. You will be moved from a Income-Based Repayment plan to a standard repayment plan when your payments under the Income-Based Repayment plan are equal to the payments you would need to make under a standard repayment plan. A standard repayment plan typically lasts for ten years.
Is There Any Way to Have Debts Forgiven and What Changes Might That Mean?
If you make payments for twenty years under an Income-Based Repayment plan, you will be eligible to have the federal government forgive any remaining student loan debt. If this happens, you may owe some taxes on the amount forgiven. Normally, forgiven debt counts as income for tax purposes in the year it is forgiven. Likewise, state law may treat forgiven student loan debt as income in the year that it is forgiven. National groups are working to make the debt forgiveness from the federal loan forgiveness program non-taxable.
What Student Loan Forgiveness Can People in Public Service Jobs Get?
If you work for a "public interest" employer, you may be eligible to have your student loans forgiven after ten years instead of twenty years. Public service jobs include full-time jobs in areas such as:
emergency management;
government;
military service;
public safety;
law enforcement
public health;
public education;
social work in a public child or family service agency;
public interest law services;
public child care;
public service for individuals with disabilities;
public service for the elderly; and
other similar jobs.
You will need to be ready to prove you worked for a qualified employer in order to get student loan forgiveness after working for ten years at a public service job.
You must make 120 payments under an Income-Based Repayment plan (or other qualified repayment plan) while you work for the public interest employer in order to qualify for student loan forgiveness. Student loan forgiveness for public service employees has many of the same advantages and disadvantages as general student loan forgiveness. You may have to pay some extra taxes. Choosing an Income-Based Repayment plan and relying on public interest student loan forgiveness may mean larger interest payments and a longer repayment schedule. This is likely to happen if you have a large increase in income or if you leave the public interest job before the ten year period is up.
Is there Other Help to Repay Loans Under This Law?
This law also provides other relief to people facing student loan debt. For example, the law increases the amount of money available for Pell Grants. Current students may be able to lower the amount of their student loan debt by applying for these grants in place of student loans. For students who do depend on student loans, the new law reduces the interest rate lenders can charge for federally-backed student loans. Although these interest rates do not apply to "private" student loans, they will benefit students eligible for loans through the Stafford and Perkins loan programs, as well as other federal student loan programs.
Where Can I Find Out More?
If you want to know more about student loan repayment, many resources are available to help you. Current students may wish to speak to their school's financial aid department about their financial aid options. At many schools, you can talk to a counselor about financial aid. Student loans are just one way to pay for your education. Those who are no longer in school may wish to contact Iowa Legal Aid. You can also visit our website to find out more about student loan repayment. Point your browser to iowalegalaid.org and select the blue box that says "Legal Information."
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