Tuesday, October 23, 2007
So, Uncle Sam will pay off your student loans? Not so fast.
In the wake of the student lender scandal, the College Cost Reduction and Access Act was intended to make student loans easier to bear for payees across the United States.

One of the chief provisions allows workers in "public service" jobs to have their remaining debt forgiven after 10 years in public service. That sounds great! And it probably is, for students who are just starting out and aren't making very much.

For those of us who have been in the work force for awhile, the deal isn't necessarily so good.

The reason is that the legislation only provides forgiveness for payors on a standard repayment plan (which has a 10-year term, and so would be repaid anyway), or an income-based repayment plan.

The income-based repayment plan isn't the simplest formula, but generally speaking, it assumes that your payments will be no more than 15 percent of your discretionary income. Discretionary income is defined as the difference between adjusted gross income and 150% of the federal poverty line. For a single person, the federal poverty line is $10,210.

When I consolidated my federal loans after grad school, I chose the extended repayment plan (30 years) because I had other loans with which to contend, and because my interest rate was (and is) extremely low (2.75%). This kept my payment low, which allowed me to rent a nice place, pay my other loans, and save extensively for retirement (and somewhat less extensively for a condo).

If I were to switch to IBR now, given prevailing interest rates, a shorter loan term, and a much higher salary, I would basically double my monthly payment. My cash flow simply can't take that kind of hit. As nice as it would be to be done years sooner (and save thousands and thousands in interest payments), I would rather concentrate on paying down my higher-interest rate loans and saving for a condo.

Depending on your circumstances, you may make a different decision.

You might want to look at these tools:

Finaid Income-Based Repayment Calculator

Department of Education Repayment Calculators



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