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The Income Based Repayment option for student loans

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Question: I’m helping my girlfriend organize her student loans while she’s wrapping up her final semester of architecture (grad) school. The Income Based Repayment plan is likely her best option for repayment. She’s going to owe about $135,000 and expects to make about $65,000 in her first year out of school. Yes, it’s a lot of debt! 

However, there is a significant amount of uncertainty around the program. There are two versions. In one, you pay 15 percent of your income over 150 percent of the poverty line for a maximum of 25 years. Anything left after the loan is forgiven. There is a newer version for borrowers’ 2012 loans that is only 10 percent over 20 years. I’d like to verify that she’s eligible for this newer program. 

I called the government help line and it was no help. I had someone who was eager to read something off their screen rather than help me. They essentially hadn’t even heard of the newer revision. Where can I find knowledgeable help on this matter? My usual sources of financial know-how don’t apply here. Thanks! Love the show! Matthew, Brooklyn, NY

Answer: Unfortunately, it is confusing. It’s a classic example of taking a good idea and tarnishing it with details. I wish they had simply adjusted the Income Based Repayment plan to the new rules for everyone, no matter when their student loans were taken out. She isn’t eligible for the improved version — just the older one (which is still good).

The new version starts in July 2014. Here’s how puts it:

The Health Care and Education Reconciliation Act of 2010 cuts the monthly payment under IBR by a third, from 15% of discretionary income to 10% of discretionary income, and accelerates the loan forgiveness from 25 years to 20 years. However, it is only effective for new borrowers of new loans on or after July 1, 2014. Borrowers who have federal loans before that date are not eligible for the improved income-based repayment plan. Public service loan forgiveness remains available in the new IBR plan.

What I would do is run the numbers on the Finaid calculators. You want to make sure that she comes out ahead with the income-based payment plan compared to the contingent-income option. The answer is usually yes, but not always.

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