President Barack Obama recently announced that he will use his executive power to make student loans a little more affordable to repay for more people. And unlike some past rule changes, these are especially designed to make it easier for older borrowers to manage loans.
The news makes it a good time to review student loan repayment options:
Standard repayment. The standard plan for all student loans has a minimum payment of $50 a month for 10 to 30 years. It is also possible to prepay even more quickly. This method will clear your debt the fastest and leave you with the lowest interest charges, so it's preferable, if you can afford it.
Income-Based Repayment (IBR). This program gives borrowers of Direct loans, Stafford loans, PLUS loans made to graduate students (not parents), and Direct and FFEL consolidation loans the ability to limit payments to 15 percent of "discretionary" income each month -- defined as the difference between your adjusted gross income (AGI) and 150 percent of the poverty guideline for your household size in your home state.
To qualify for IBR you must have a "partial financial hardship" -- that is, your payment under IBR would be lower than your payment under the standard plan. Simple enough.
Stretching out the payments this way is good if it saves you from delinquency or default. It also results in higher interest charges. It's quite possible that your monthly payment under IBR won't cover even the interest on the loans. If that happens, under IBR, if you have subsidized loans, the federal government will pick up that accrued interest, but for no more than three years.
After 25 years under IBR, the loan balance will be forgiven. But at that point you may have a large tax bill, since the forgiven balance is treated as income.
Pay As You Earn. This program is an update and improvement on IBR. It gives borrowers of federal student loans the right to limit payments even lower, to 10 percent of "discretionary" income. And forgiveness happens after 20 years, not 25. Obama has just widened eligibility for Pay As You Earn to millions more qualifying borrowers who borrowed before October 2007 and have not borrowed since October 2011.
Public Service Loan Forgiveness. For people enrolled in IBR or Pay As You Earn who remain employed in the public sector or work for a nonprofit, forgiveness of the loan comes after just 10 years, not 20 or 25. You can determine eligibility and apply for all three programs at Studentloans.gov.
Unfortunately, none of these plans applies to private, unsubsidized student loans, or to PLUS loans taken out by parents on behalf of students.