Income Based Repayment (IBR) and the Federal Student Forgiveness Law

On Wednesday, under the College Cost Reduction and Access Act of 2007, the repayment of college loans will become a whole lot more manageable for lower income wage earners.

New Options

The new Federal Student Loan Forgiveness Law is set to help student repayment in two significant ways:

• Lowering the monthly student loan payment on federal student loans (Income Based Repayment or IBR); and

• Canceling remaining loan debt after 10 years for those who have entered public service (Loan Forgiveness for Public Service).

Income Based Repayment (IBR)

Income based repayment (IBR) offers enormous potential reductions in the monthly payments for high debt/low income borrowers. Designed for those with “partial financial hardship,” IBR limits annual educational debt payments to 15% of a borrower’s discretionary income. For the purposes of the law, discretionary income is defined as adjusted gross income minus 150% of the poverty level for the borrower’s family size.

Under the IBR plan, the loans eligible for consideration include: all Federal Direct Loans (FDL) and federally guaranteed loans (FFEL) including subsidized and unsubsidized Federal Stafford loans; Federal Grad PLUS loans (but not Parent PLUS loans); and Federal Direct Consolidation loans. Federal Perkins Loans are only eligible when part of a Federal Direct Consolidation Loan.

The Detroit Free Press offers the following as an example of the potential savings:

Take a college grad who has $40,000 in federal student loans and an adjusted gross income of $30,000 each year.

If we use this example, the grad would pay $171.94 a month using the new plan — compared with $460.32 with a standard 10-year repayment plan or $277.63 a month for an extended 25-year repayment plan.

As a person receives annual salary increases, the monthly payment would rise only according to the percentage of salary increase. In the case of a married couple, each would be eligible for the program and the eligibility would be dependent on each individual’s situation, not the combined income of the two individuals.

The new IBR option goes into effect July 1, 2009. Members of the Class of 2009 become eligible within two months of graduation.

Loan Forgiveness for Public Service Employees

In addition to repayment reduction under the law, students entering public service are also eligible for loan forgiveness. Upon entering full-time public service, once a borrower makes 120 qualifying loan payments on a Federal Direct loan (including Federal Direct Consolidation loans), the unpaid balance remaining including the accumulated interest on the loan is forgiven. The worker must remain in public service for the entire ten year period and the 120 payments timeframe but there is no limit to the amount to be forgiven.

The time period for public service is retroactive to October 1, 2007 meaning those borrowers who have already elected public service may begin counting the ten year period at that point. Some restrictions occur for those who had already consolidated their loans and those restrictions may move the eligible period forward to July 1, 2008.

In the case of loan forgiveness, only Federal Direct loans (including Federal Direct Consolidation loans) are eligible. Payments made on federal loans in the Guaranteed (or FFEL) program are not eligible for the loan forgiveness aspect (only eligible for IBR).

A Major Step Forward

The new law represents an enormous positive development for those students who have accumulated significant federal college debt yet have limited income. To learn more about the program and examine the calculation process visit:

• Georgetown Professor Phil Shrag’s law review article detailing IBR and Loan Forgiveness for Public Service Employees (pdf).
• The IBR monthly repayment calculator.
• Federal direct consolidation loan information and applications.