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Feds: New student loan repayment options set

Thursday - 12/6/2012, 5:24pm  ET

By JUSTIN POPE
AP Education Writer

(AP) - A new version of the income-based federal student loan repayment program that's more favorable to many borrowers will go into effect starting Dec. 21, according to regulations scheduled for publication Friday.

The "Pay as You Earn" program will allow eligible student-loan borrowers to cap monthly payments to 10 percent of discretionary income, and have their loans forgiven after 20 years. An earlier version of the program capped payments at 15 percent and offered forgiveness after 25 years. Congress had scheduled the new program to phase in in 2014, but the Obama administration took regulatory measures to make those options available sooner. It's estimated 1.6 million borrowers could take advantage of the program.

To qualify, borrowers must have started taking out federal loans after October 1, 2007, and received at least one disbursement after October of last year. They also must qualify for partial financial hardship based on the portion of their income standard repayments would cost. The program applies only to certain direct federal loans, and not to private loans from banks and other non-federal lenders.

The program will set maximum monthly payments based on income and family size, which can adjust each year. Typically those monthly payments could be lower, though there are also possible downsides: By choosing a so-called Income-Based Repayment borrowers could end up paying more over the life of a loan, and they will have to submit documentation each year. Some critics have also argued the program could encourage students to borrow more than they should.

But President Barack Obama has touted the program as a way to ensure borrowers aren't crushed by student debt burdens at a time when outstanding student debt has by some estimates surpassed $1 trillion.

Two-thirds of the national college class of 2011 finished school with loan debt, and those who borrowed walked off the graduation stage owing on average $26,600 _ up about 5 percent from the class before, according to recent figures from the Project on Student Debt.

The Pay as You Earn program also offers loan forgiveness after 10 years to those involved in public service who have made all their payments on time.

The department has also developed a tool allowing borrowers to have their tax data transmitted directly from the Internal Revenue Serivce into their Income-Based Repayment application.

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Online: http://www.studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn

Follow Justin Pope at http://www.twitter.com/JustinPopeAP


(Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)