Q. My husband and I have student loans and have heard there are some changes to the repayment strategies based on income that may benefit married couples. We don't make much money and we just had our first child so any reduction in our monthly payment would be very helpful. Could you explain how these work? Do you know where we can find more information?
Sallie Mae recently announced changes to the federal student loan income-based repayment plan. The changes, which took effect Thursday, may be of benefit to those with older student loans and married couples who were not previously eligible for this repayment plan.
The income-based repayment plan caps the monthly loan payment at 15 percent of discretionary income for those who qualify. The new rules let people calculate eligibility using either their current monthly payment or their original monthly payment, whichever is larger. The new rules also eliminate the marriage penalty. Under the old regulations, a married couple, both with student loans, had their income-based repayment eligibility determined separately based on their joint income. One spouse's loan balance was measured against total household income without taking into account thespouse's federal loan obligations. Under the new regulations, married borrowers will have their individual eligibility determined on the basis of their joint return and the combined eligible loan debt of both spouses.
Income-based repayment is one of several repayment options for borrowers of student loans made under the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program. These loans include Stafford, Grad Plus, Federal Consolidation (if they don't include any Parent Plus loans) and Perkins if consolidated to a FEEL or Direct Loan program. Plus loans made to parents are not eligible for income-based repayment.
If you qualify, the required monthly payment will be capped at an amount that is intended to be affordable for your income and family size. The payment amount will usually be less than the payment under a 10-year Standard Repayment Plan. The income-based repayment plan will also forgive any remaining debt after 25 years of qualifying payments.
To qualify, you must have a partial hardship. You'd qualify if you have enough student loan debt that it would take more than 15 percent of your income above 150 percent of the poverty level to pay off your loans under a standard 10-year payment plan.
The following example from the Federal Student Aid website may be helpful:
It assumes $40,000 in eligible loans and uses the 2009 poverty guideline amount of $27,465 for a family of three. If your adjusted gross income is $40,000 the difference would be $12,535 ($40,000 minus $27,465). Fifteen percent of that is $1,880; divide this by 12 and it results in a monthly payment of $157. At a 6.8 percent interest rate, this compares to a monthly payment of $460 under a 10-year Standard Repayment Plan.
That's quite a reduction in your monthly payment, but the payments will be madeover a longer period of time. This means you will pay more interest under income-based repayment than you would pay under a 10-year Standard Repayment Plan, but in these tough economic times it may make sense to do so.
The Sallie Mae website ( SallieMae.com/ibr) has some easy-to-use calculators to see whether you are eligible when your loans and income level are considered. For an official determination of your eligibility for income-based repayment, you will need to contact your loan servicer. If you are unsure who holds your loans or who your loan servicer is, you can contact the Department of Education's National Student Loan Data System at www.nslds.ed.gov.
