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Loan Repayment Based on Income: Will It Relieve the Pain? | EdFed.com
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Loan Repayment Based on Income: Will It Relieve the Pain?
By Gitanjali Hazarika
 
An income-based repayment (IBR) plan has been designed as part of the Higher Education Access Act of 2007. This plan has been conceived for students who intend to pursue jobs that are not lucrative enough, such as those in public service. Although the House has passed the bill, it still waits in the White House corridors for President Bush's signature. Bush aides have reportedly recommended that the president veto the bill in its present form.

The new plan would be a substitute for both income-sensitive repayment (ISR) and income-contingent repayment (ICR). The ISR plan facilitates repayment of loans in easy monthly installments for people who are financed under the Federal Family Education Loan Program (FFELP). ICR calculates monthly installments based on the borrower's annual income, family size, and total loan amount for those students who want to repay their student loans while working in jobs that do not have attractive salaries. The new plan is partially based on ICR. Since the borrower's mode of repayment is directly proportional to his or her income, IBR will be a better option if the borrower's financial circumstances improve later on.

If the borrower obtains a federal loan such as a Stafford Loan, SLS Loan, PLUS Loan, HEAL Loan, or consolidation loan from a financial institution, the lender will likely offer an income-sensitive plan. Income-sensitive plans are structured similarly to the government's income-contingent plan, with a few major differences. Unlike under the federal plan, there is no provision for loan forgiveness. The repayment amount will also be higher than that required by an income-contingent plan since the installments must include accumulated interest and because the loan has to be paid in full.

Repayment figures change every year based on the borrower's annual income, household size, and amount borrowed from the lender. For those borrowers who file joint federal tax returns, the joint income of both spouses will be used to calculate monthly installments according to the present rules. However, IBR will only be offered to students who borrow under the William D. Ford Federal Direct Loan Program; loans offered under this program include the Stafford Loan, Grad PLUS Loan, and consolidation loans. This type of assistance will not be awarded to borrowers of Parent PLUS Loans, consolidation loans that include Parent PLUS Loans, or loans taken out with private student lenders.

Both ICR and ISR place ceilings on monthly payments based on percentages of the borrower's discretionary income. However, definitions of discretionary income and appropriate percentages vary from plan to plan. Income-based repayment sets the ceiling at 20% of the borrower's monthly discretionary income. Discretionary income is calculated as the difference between 100% of the federal poverty line, which corresponds to the borrower's household size and state of residence, and the borrower's adjusted gross income. Income-contingent repayment also caps monthly payments, and there is a $5 minimum monthly payment. The annual payment amount might differ but will not be above 20% of your discretionary income. To learn what your individual maximum payment would be, you can use the online calculator at www.ed.gov/DirectLoan/calc.html.

If the borrower's income is far below average, the requirement to repay under an income-contingent plan will be waived. Even if it is not entirely waived and repayment is still necessary, the amount paid each month will be less than the accumulated amount of interest. However, though this may provide relief for the time being, the loan balance will continue to escalate. The borrower will be able to relieve his or her burden only after 25 years. If the loan remains unpaid at that point, the government will forgive the remaining amount owed. However, to be eligible for forgiveness, the borrower will have to report the amount of money forgiven and pay taxes on the amount unless he or she can prove bankrupt status, according to the IRS.

Although IBR is seen as a potential boon to low-income borrowers, the plan's provisions for married borrowers have some gaps. When calculating adjusted gross income, the plan combines the income of both spouses. This imposes a penalty on married borrowers that would not apply to two unmarried individual borrowers. On the positive side, the borrower is not tied to this 25-year repayment program if he or she signs up for it. Borrowers can change plans or finish paying off their loans early if they so desire.




 


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