Education becomes more affordable with IBR loans

The Department of Education has run a new program, income-based repayment, that caps monthly payments based on income and forgives remaining balances after 25 years. Eligibility for IBR, which is available for direct federal loans, is determined by a person`s income and loan size.

Experts say that monthly payments would amount to less than 10 percent of income for most of the estimated 1 million people expected to enroll and would never exceed 15 percent of any income above about $16,000 a year (or 150 percent of the poverty level). Those who earn less than $16,000 would not have to make any monthly payments and those choosing to work in public service could have their loans forgiven after just 10 years.

The new payment option is intended to give borrowers, who earn modest salaries, greater flexibility to save for retirement, buy a home or even pay for their own children`s education. By stretching repayment over a longer period, monthly payments are kept at a reasonable portion of income, though most people would not see any savings on the total cost of the loan.

However, in some cases, accruing interest could push the cost of the loan higher. And since loans are likely to be paid off within 25 years, the loan forgiveness aspect of the program won’t apply to most people. To save on interest costs, those who could afford to would be better served paying off loans faster, said Mark Kantrowitz, publisher of FinAid.org, which tracks the college financial aid industry.

Besides, the government offers a program similar to IBR, which is also available for direct federal loans as well as federal loans administered through private lenders. The income-contingent repayment plan is not as lenient as the new one, however, with payments capped at 20 percent of income beyond 100 percent of the poverty level. Most of those enrolled in the income-contingent plan are expected to switch over to the new program.

In addition, parent PLUS loans, the federal loans parents can take out to pay for their children’s education, are not eligible for either payment plan.