Income-Based Student Loan Repayment

Apr 25, 2012 by

Indebted college graduatesSince 1985, the cost of college in the U.S. has risen 439%, slamming today’s college-bound kids and their families with huge higher education costs. That 439% increase is about double the highly publicized jump in medical care costs and four times the rate of inflation over the same span. Here’s another way to put the cost of college in context: In 2011, tuition accounted for 43.3% of college revenue, way up from 23.2% twenty-five years ago.

25 Years of Tuition Increases

Net Tuition as a Percent of Public Higher Education Total Educational Revenue, U.S. Fiscal 1986-2011

Skyrocketing College Costs = Ballooning Student Debt

The inescapable result of these college cost trends is that today nearly all young adults in the U.S. who choose to go to college have no choice but to take on student loan debt to pay for it. Also, whether college is “worth it”—given its very high cost, the less than robust job market, and the prospect of graduation with massive debt—has become a legitimate topic of debate in the U.S. (See “Here We Go Again: Is College Worth It?”)

Even worse, student loan debt is particularly onerous among the various types of debt. In general, bankruptcy cannot discharge student loan debt, except in extraordinary circumstances. Simply being unable to find a job paying enough to make room in one’s budget for student loan payments would not qualify as “extraordinary.” And for federal student loans, the government has and uses the legal remedy of garnishing the federal tax refunds and benefits of delinquent borrowers.

Student Loan Help: Income-Based Repayment Plan

Income-Based Repayment (IBR) of federal student loans has been around since 2009, but with the explosion in student borrowing has gained notoriety. In short, IBR caps student loan payments of eligible borrowers based on income and family size, helping to make payments affordable. Also, after 25 years of qualified payments, any remaining student debt is forgiven.

Income-Based Repayment Plan Eligibility

IBR eligibility is based on family size, income, and loan balance outstanding. To qualify, your student loan payment under a standard 10-year repayment plan must be greater than the maximum payment under the IBR Plan.

To learn more about the IBR Program and determine whether you’re eligible, visit the IBR page of Student Aid on the Web.

NEW: Pay-As-You-Earn Proposal

Last October the Obama Administration proposed further easing of student loan debt repayment burdens. The Pay-As-You-Earn proposal is not law, but as proposed would cap student loan payments at 10% of discretionary income and forgiveness would kick-in after 20 years of payments. Details of this program have not been finalized, but you can read a White House Fact Sheet on the proposal and track its progress.

Public Service Loan Forgiveness

For graduates willing to work in certain jobs, student debts outstanding after 10 years of monthly payments (all made while working in the qualifying job) can be forgiven under the Public Service Loan Forgiveness program. In general, qualifying jobs include work in a non-profit, tax exempt organization; federal, state, local, or tribal government; or AmeriCorps or the Peace Corps.

To learn the details, visit the PSLF age of Student Aid on the Web.

What Are Your Thoughts?

Have you taken advantage of any of these programs to help you manage student loan debt? What do you think of the new reality that, for most, a college education means entering the workforce with significant debt? Are you counseling your children that college may not be the best choice for them?

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  1. Trey Smith

    Thanks for the article – very thought provoking. I was fortunate to have had education benefits from my military service to assist in paying for my college education. With that said … I like to challenge the assumption that college is necessary to succeed in life. Education, not college should be the goal – I think the two are often separated. I have hired many employees and the success of the employee was not driven by their degrees but by the application of their education and knowledge. Going to a pay-as-you-earn system will add to the overall problem of debt. It takes responsibility away from from those borrowing the money when/if they don’t go out and earn enough. As a manager I have experienced the other side to this problem when an employee asks for a raise because they can’t pay their bills. Your work and your effort determine your compensation – not how much you owe. I don’t think college should only be for the wealthy but I believe that someone can learn as much as or more than someone with a degree by finding a mentor and learning from actual experience. The whole college/education paradigm needs a realignment.

  2. One of my clients just applied for and received the new income based payment. It knocked quite a bit off of their payment – maybe 20-30%! I love the breakdown and the sheer education dump…great work! Will be linking to this in my weekend reading post!

  3. In Canada we have a different set up. In fact where I live if you come back and work in the province you were born to work after completing school you can receive 60% of your tuition back. It is a huge financial benefit. Both my hubby and I have taken advantage of this. It has help eliminate our student debt. 

    • Sounds like Canadians appreciate higher education is an investment in the country’s/province’s future. I wonder how a proposal of a similar policy in the US would be received.

      • I think it would depend on who you are talking to. We do pay higher income tax which supports other national policies like health care etc. which is not in effect in the USA. This could be a constraint. 

  4. Adam - Magical

    In the UK, all student loans are based on income….we pay 9% of all earning over £15k a year and forgiven if I have any debt left when I’m 65 (I graduated in 2007). Newer graduates and current college kids have higher tuition than I did but they don’t have to pay anything back until they are earning over £21k a year and debt is forgiven after 25 years.

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