New repayment option on student loans

There's good news on the horizon for those with federal student loans. The government is introducing a new income-based payment program on July 1.

The timing of this program couldn't be better - new college graduates are coming into a very poor job market. With an unemployment rate currently hovering around 9 percent there are plenty of college graduates without jobs, or forced to accept low-paying jobs, faced with student loans averaging $22,000. And they don't have much time to line up work - borrowers must begin to repay their federal loans within 6 months of graduation.

If you are unemployed you can apply to defer your payments for up to 3 years. But what if you have a job, but not a lot of income? Under the Income-Based Repayment plan (IBR) your payments are capped to no more than 15 percent of discretionary income, an amount that is based on the federal poverty guideline. "Discretionary income" is defined as the difference between adjusted gross income and 150 percent of the federal poverty line that corresponds to your family size and the state you live in (from www.finaid.org).

This program applies to anyone with federal loans: the Stafford, Grad Plus and federal consolidated loans. Your loans must be in good standing.

If your reduced payment doesn't cover the interest accruing on the loan the unpaid interest will be added to the balance. And no matter how much you have repaid, the loan is forgiven after 25 years as long as you've made all of your payments.

This program is intended to encourage college grads to accept jobs in low-paying fields, but has the unintended benefit of helping out during this difficult economic time. It will enable those who otherwise might have defaulted on their loan, creating a poor credit history, to keep the loan in good standing until income goes up in the future.

You'll need to contact your lender to enroll in the program. There is a lot more information about the program at www.ibrinfo.org.