Reining in your loans

Use the federal program, no matter how hard your lender tries to sell you something else
By NICHOLAS SCHROEDER  |  January 25, 2012

Last October, President Obama initiated an improved income-based repayment plan called Pay As You Earn. It stipulates that eligible borrowers may consolidate their existing loans with the federal government. Doing so would cap their monthly payments at 10 percent of their discretionary income, and forgive any existing amount after 20 years. Under the new arrangement, if your income is 150 percent of the federal poverty line ($16,335 for single borrowers), you pay nothing. If you're somewhere above that level but having trouble, the plan can still help.

Sounds pretty cushy, right? The problem is, there are a lot of catches. Of course, private loans are ineligible: the plan is only good for your federally guaranteed student loans and direct loans. And though the new arrangement is even better than 2010's Income Based Repayment plan (which you can also learn how to apply for here), the pool of borrowers who can actually take advantage of it is small indeed. Here's what you do.

CONSIDER THE ALTERNATIVES Seriously. If struggling borrowers everywhere uniformly defaulted on our loans, wouldn't the threat of bad credit and substantial fees be toothless? This is the argument behind the Occupy Student Debt Campaign. After reading some of the horror stories at occupystudentdebtcampaign.org and comparing my own, it's hard to argue that the system isn't cracking at the seams. I'm not necessarily saying you should default on your loans, but you should know there's a growing movement of informed, angry people who are doing just that.

FIND OUT IF YOU'RE ELIGIBLE, AND FOR WHAT Again, you're on your own with private loans, and unless you're a current student or very recent graduate, you likely won't qualify for the new plan either. If you've already graduated — even just last year — and plan to take out no additional loans, you're not eligible for the Pay As You Earn repayment plan. If you're taking out a new loan and have an existing loan that was disbursed before 2008, you're also not eligible. And of course, if your loans are in default, you're on your own, too. But if you're a somewhat-broke current student (and if you're reading this, chances are you might be) who's thinking about becoming more indebted, it's your lucky day.

CONSOLE YOURSELF Even if you're not eligible for the new student loan plan, you might still be eligible for the 2010 IBR, which is still pretty helpful. The 2010 arrangement caps your monthly payment at 15 percent of your discretionary income, and forgives any remaining debt after 25 years. It's a little less generous, sure, but at least it addresses a larger chunk of the 36 million borrowers currently in repayment.

PROJECT YOUR SAVINGS The independent website IBRinfo.org can give you a rough outline of what you might save based on your current earnings, principal balance, and interest rate. Don't be dissuaded if your projected savings don't wow you. The actual amount might be much more.

MAKE SOME CALLS There's so much fine print in these loan operations that it's extremely easy to get confused. You'll want to call Sallie Mae and ask directly if you're eligible, but be tough about it. To bypass their automated matrix and talk to a live human, press 0 at every turn, even when it seems like it's not working. Ask if your loans qualify for the president's new IBR plan, and if they don't, ask if they qualify for the 2010 IBR plan. Be direct, and don't let them sell you any of their other repayment options, which save you money now while tacking it on in capitalized interest later.

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