Student Loan Repayment

Updates

April 16, 2013: See below. Right now, the "forgiven" student loan is treated as income. President Obama will change that: "forgiven" student load will not be treated as income. This is huge. Students should borrow as much as they can possibly afford; they know that the max they will have to pay is 10% of their discretionary pay for 20 years. Meanwhile, colleges and universities can now charge literally as much as they want. Price of a college education will no longer be an issue.

 

Original Post

CNBC is reporting an interesting story for those with student loans. Most folks assume that student loans require a monthly payment determined by the lender based on loan amount, interest rate, and repayment period.

However, everyone with a student loan should apply for income-based repayment (IBR) schedule. The worse that will happen is that you won't qualify, but that is very, very unlikely. I would imagine the vast majority with a student loan would qualify.

The loan repayment is maxed out based on discretionary income, and the remainder of any loan outstanding after the repayment period is forgiven.

The OLD IBR:

• monthly payments capped at 15% of discretionary income
• 25-year repayment period
• any loan remaining not paid off at the end of 25 years is forgiven

The NEW IBR (part of the ObamaCare bill):

• monthly payments capped at 10% of discretionary income
• 20-year repayment period
• any loan remaining not paid off at the end of 20 years is forgiven

Using this calculator, a $70,000 loan at 6.8% over 20 years: $534.34/month.

If one qualifies for an IBR loan over 20 years with an income of $40,000/year: $291/month.

One needs to re-apply annually, so it's impossible to determine how much of the loan would be written off at the end of the 20-year period, but it could be substantial. Loan forgiveness would probably be a taxable event.