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Help is on the way for some with student loans

Published Aug. 25, 2014

If you are struggling with student loans that you took out before October 2007, there is a new, more generous option in the works that could help you manage your debt payments.

In June, President Barack Obama signed an executive order that expanded the "pay as you earn" program, or PAYE. The program caps monthly student loan repayments at 10 percent of income and allows any balance after 20 years to be forgiven.

The program has been available since late 2012 for some, but the president's order widens the pool of eligible borrowers to include those with older loans or who stopped borrowing by October 2011. The administration says the expansion could make the option available to millions more student borrowers.

There is a catch, however. It won't become available until late next year.

What if you need help now?

You can consider other programs already in place, such as income-based repayment, or IBR. It is one of several income-driven programs available to help borrowers manage student debt. Details of the programs vary depending on the type and date of the loan. Terms are less generous than with PAYE, but they can still make a big difference in your monthly payment if you have high debt relative to your income.

IBR is the most broadly available option, covering new and older loans. IBR "classic," as it is known by some, caps monthly repayments at 15 percent of your income and allows any balance remaining after 25 years to be forgiven. IBR classic is an option for both direct loans — made by the federal government — and older loans — made by private lenders and guaranteed by the federal government — under a program that concluded in 2010. The PAYE option, by contrast, is available only for direct federal loans.

(Last month, an updated version of IBR became available for new borrowers, offering a cap of 10 percent of your income and a 20-year discharge period. But that is just for students taking out their first loan after July 1.)

Evaluating the different repayment plans, with their varying requirements, can be confusing.

Here are some questions about income-driven repayment programs:

How do I know if income-driven repayment is right for me?

If your total debt exceeds your annual salary, then you might benefit from programs like IBR and PAYE, said Mark Kantrowitz, publisher of Edvisors.com.

Lauren Asher, president of the Institute for College Access & Success, urges borrowers to avoid getting bogged down in the programs' details. Instead, you can go to studentloans.gov and apply for the program offering the lowest payment for which you are eligible. The Education Department's repayment estimator at tinyurl.com/lekxgto can help give an idea of what your payments would be under the various options.

The institute provides a summary of the current income-driven repayment options at tinyurl.com/m9h9cu7.

How is my income factored into my payments under the IBR and PAYE programs?

Payments for both programs are based on a percentage of your "discretionary" income, or what you earn above 150 percent of the federal poverty line — $17,505 for a single person in 2014. So if your income is $40,000, your discretionary income is $22,495.

Under the original IBR program, for instance, someone with that income and $60,000 in debt would have an estimated initial monthly payment of $281, according to an example from the Education Department. (Under PAYE or the revised IBR program for new borrowers, it would be about $188.)

By comparison, your payment under the standard, 10-year repayment plan — with no income-driven relief — would be about $738, according to the estimator.

If I'm in default on my student loans, can I qualify for income-driven repayment plans?

Your loans must be in good standing to be eligible.

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