Ask Money

Student loan reform

Chris Farrell Aug 4, 2010

Question: Can you untangle what the student loan reform provision in the health care bill means for current borrowers in repayment? I read that borrowers will be able to have payments capped at 10% of monthly income and have debt forgiven after 20 years. Who will be eligible for this and when does it go into effect? Also, public service workers will have debt forgiven after 10 years. How will they define public service worker? And will I, as a borrower in repayment still be with my current servicer? Thanks!!! Adelia, Brooklyn, NY

Answer: To get right to the crux of your question: The changes in the federal student loan program won’t affect you.

You aren’t eligible for the coming modifications to the income-based repayment (IBR) plans for student loans. The changes to the IBR program don’t come into effect until July 1, 2014.

The advantage of the income-based repayment plan is that it bases a borrower’s monthly tab on their income rather than their debt burden. The current cap on monthly payments is 15% of discretionary income. The cap will drop to 10% after July 1, 2014. What’s more, the remaining loan amount with an IBR plan will be forgiven after 20 years. That’s down from the current loan term period of 25 years.

Students who graduate before 2014 can’t take advantage of the changes in the program. That includes undergraduates who take out federal student loans in the years running up to 2014.

Yes, the principal and interest on remaining federal student loans can be forgiven after 10 years of public service employment. However, there are a number of restrictions to the program. For instance, forgiveness only occurs after 120 monthly payments made on federal student loans after October 1, 2007. The payments that qualify must be made on federal direct loans.

What kind of work qualifies as public service? It’s a long list that includes government employment, military service, law enforcement, public health, early childhood education, and social work. The website has a good review of the public service program and long list of qualified occupations here.

The company that now manages your student loan will continue to service it.

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