Repaying Student Loans Becomes Easier

Starting Wednesday, hundreds of thousands of federal student loan borrowers may find it easier to pay back their loans because their monthly payments will now be based on their incomes and family size. The change is especially welcome for graduates who are having a tough time making a living in a sagging economy.

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If you are struggling to make payments on your federal student loan, you can breathe a little easier today. You can now apply for a program that bases your monthly payments on your income and family size.

NPR's Claudio Sanchez reports.

CLAUDIO SANCHEZ: Twenty-five-year-old Chanelle Snyder(ph) sells lotions, soaps and perfumes at a suburban mall near her home in Gaithersburg, Maryland.

Ms. CHANELLE SNYDER: I work part time, 15 to 20 hours a week.

SANCHEZ: That's about six to $700 in take-home pay every month. Her college loan payments, though, are over $800 a month. Snyder's total debt, not counting interest, is $67,000 in private and federal student loans. After six years of college in pursuit of a double major, she's two-credits shy of her degree, but can no longer afford college.

Ms. SCHNEIDER: So I have to leave, and I came out of a high school as a 4.0 student.

(Soundbite of laughter)

Ms. SCHNEIDER: So, this wasn't supposed to happen to me, you know? I was supposed to go to college, graduate in four years and get a job.

SANCHEZ: In her current job, though, Schneider can't possibly make her payments. This is where the income-based repayment plan kicks in. It'll help her with the $22,000 she owes in federal loans. Because her monthly payments exceed her income, Schneider won't have to pay a dime, zero, until she earns more money, of course. Once her income begins to climb, the new plan sets a cap on what Schneider's maximum payment will be every month, roughly 15 percent of her discretionary income. And if she's still making payments 25 years down the road, the government will forgive the balance and interest on her loans.

Ms. LAUREN ASHER (President, Institute for College Access and Success): It provides a light at the end of the tunnel so that your student debt won't follow you to the grave.

SANCHEZ: That's Lauren Asher, president of the Institute for College Access and Success. Her organization and the U.S. Department of Education have each put up a calculator on their Web sites to help people figure out if the new income-based repayment plan is for them.

Ms. ASHER: A good rule of thumb, if you want to know whether you'd be eligible for income-based repayment, is that if you owe at least as much as you earn, you probably qualify.

SANCHEZ: Let's say a student borrowed $30,000 and is now earning about $25,000 a year, says Asher. Under the income-based repayment plan, his monthly payments will drop from $345 to $110 a month. That's typical for students with mostly federal loans, but the plan doesn't cover private loans.

Take, for example, Brittany Taylor(ph). She has a master's in music from the University of Miami and is earning about $1,600 a month working for a non-profit arts program in Orlando, Florida. She borrowed $85,000 mostly in private loans. Her lender is Sallie Mae.

Ms. BRITTANY TAYLOR: I'm paying $265 a month, and I was, like, how can we work this out? And I basically begged, you know, on the phone. I'm sure other students have had to do it, too, to where I can get this, you know, into a reasonable payment every month.

SANCHEZ: Maybe then she could begin paying back her federal loans, says Taylor, not just her private loans. There are lots of students like Taylor, says Lauren Asher.

Ms. ASHER: And unfortunately, people who have private loans - and that's a growing proportion of undergraduates - have risky, usually variable rate loans that are more like a credit card or a subprime mortgage than student aid. And they are generally at the mercy of their lenders in terms of repayment options.

SANCHEZ: Still, says Asher, the income-based repayment plan is a huge step towards a more reasonable loan repayment policy. The question is whether Congress and the Obama administration will move to include private loans in that policy.

Claudio Sanchez, NPR News.

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