The Loan Groan

Never a borrower or a lender be dept.  
By DEIRDRE FULTON  |  July 8, 2009

loan main

Each month, with miserable certitude, the snail-mailboxes of middle-class twenty- and thirtysomethings are stuffed with student-loan bills, from both federal and private lenders. The balance seems to remain stagnant, even as we mail in check after check. Politicians, economic analysts, and activists have said student-loan debt is the new American albatross, hindering post-graduation goal achievement and stunting economic growth on both individual and national scales.

But a new federal program that went into effect on July 1 aims to help overburdened student borrowers. The Income Based Repayment plan, created as part of the 2007 College Cost Reduction and Access Act (CCRAA), caps monthly loan payments at 15 percent of the borrower's "discretionary income." (Discretionary income — get out your abacus — is the difference between actual income and 150 percent of the federal poverty line, which, for a single person, would be $16,245.) If you make $30,000 per year, then, your payments would be 15 percent of $13,755, split into monthly increments of $171.93. It resets annually, based on changes in your income or family size.

The plan period is 25 years, so if you make your required payments for that long and still haven't killed your debt, it will all be forgiven. But and this has been widely overlooked, so heads up — that forgiven debt is considered taxable income. While you might get rid of your outstanding loan debt in a quarter century, you'll still have a pretty hefty tax bill.

Another element of the CCRAA is the public-service loan-forgiveness program, which encourages graduates to enter public-service careers (including teaching, military service, public law and defense, and firefighting, but not, alas, journalism). After 10 consecutive years serving in one of these fields and making loan payments, a borrower's entire loan balance (and accrued interest) will be wiped out — without being considered taxable income.

Both programs — which a public-service employee can combine for more affordable and quicker debt reduction — aim to help graduates with high loan debt and low salaries. (A repayment calculator, available from the US Department of Education at studentaid.ed.gov, can help you see if the plan makes sense for you.) As Senator Ted Kennedy, chairman of the senate's Health, Education, Labor, and Pensions Committee, and co-sponsor of the original bill, said in a letter to college presidents: "[T]he prospect of heavy loan burdens is discouraging more and more students from attending the college of their choice, or pursuing jobs in the public interest. More than two-thirds of college students graduate with federal loan debt averaging $20,000 after graduation."

All 12 members of Massachusetts's congressional delegation supported the CCRAA in 2007, as did all of Rhode Island's.

Maine's congressional delegation also universally supported the measure, and first-term US Representative Chellie Pingree issued a statement July 1 calling the IBR and public-service programs "a remarkable opportunity for young people," and "the single largest investment to help Americans pay for college since the GI Bill."

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