Student Loans: Income based repayment (IBR) 10/27 Update

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To stem the tide of overwhelming student debt, the Federal Government has come up with a number of programs that can ameliorate the borrower’s level of pain. Some entail public service based efforts which when a stipulated period of service is completed, the balance of the loan is forgiven. Another attractive offering is the IBR or income based repayment.

This program, which was established in 2012, allows the borrower to pay a percentage of their discretionary income to meet their monthly payment obligation and can reduce the budget squeeze of a much larger payment as per the original loan agreement. On Tuesday October 27, borrowers with loans on record before October 2007 who were ineligible to participate in the IBR program can now join the party.

So at a glance how does work?

You increase the standard term of the loan from 10 years to a max of 20 years (25 years with grad school loans) and voila your monthly payment goes down measurably-maybe hundreds of dollars per month. On the surface this looks like a really good deal and allows these former students to turn the tables of debt burden into having the possibility of participation in the real American Dream! Home ownership, marriage, having children could be within reach! Right?

Caveat emptor…

Not so fast my friend.  You really need to look at the DETAILS of your loan agreement. One gotcha (and there are probably others): You may find that your loan balance INCREASES over time because your new low payment amount may not cover the INTEREST that accrues against your original loan amount.

The experts have mixed views on this program, some seeing it as a life saver for millions of student borrowers, while others see IBR as a band-aid like palliative that is not addressing the real problem: ever rising tuition increases.


About the Author:

Chip Law
Chip Law is an IECA Professional Member and an Educational Consultant located in Charleston, South Carolina. He helps students and adults define their career path and refine their approach to the job market.