Student Loan IBR Income Based Repayment Plans

Graduation CakeA few weeks ago I asked newsletter subscribers to email me with the things that concerned them. Many readers told me that the cost of higher education, specifically the college and university level, and their student loans were some of the things on their mind.

A few years ago, I wrote about how my sister took advantage of a student loan forgiveness program for teachers. It’s a great program if you can participate because it helps the (former) student and it helps society as a whole by putting incentives and compensation more in line with the work performed. Today, I wanted to discuss the Income-based Repayment plan created by the College Cost Reduction and Access Act of 2007. It only became available/effective on July 1 of 2009.

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Free College Money: The FAFSA

FAFSA FormThe last few weeks have been hectic in the BFP household as we had a combination of the holiday festivities and my wife’s applications for graduate school. She’s applying to Ph.D. programs, so she’s been researching graduate programs, writing applications, preparing for the GRE, and taking the GRE these last few weeks. Fortunately, one problem she hasn’t had to tackle was how to pay for the Ph.D. because they often get tuition covered by the school, plus a stipend.

I graduated undergrad with about $25,000 in student loans, a paltry sum when compared to some of my friends who had upwards of $50,000 and $80,000 in student loans. Also, the majority of my loans were low-interest deferred Stafford loans. I was only able to get those loans, and other grants, because I filled out a FAFSA form… something 25% of families fail to do.

I was amazed when I read a press release from Sallie Mae that stated 25% of families didn’t even complete the FAFSA application! Sallie Mae is another one of those former government sponsored entities that privatized a few years ago (like Freddie Mac and Fannie Mae) and they deal strictly with student loans and college savings plans. The FAFSA is the Free Application for Federal Student Aid.

How do I apply?
You can either fill out a paper form or you can apply online. Applications can be submitted starting January 1st (so you can do it now) and the deadline is June 30th.

Why is the FAFSA so important?
It’s used to determine everything in federal aid. Need- and non-need-based grants, scholarships, work-study and low-cost student loans – they all use the FAFSA to determine who gets what. Last year, $163 billion dollars in student aid was awarded and 40% of them were grants that do not have to be repaid. That is free money. If you don’t complete a FAFSA, you are not eligible for any federal financial aid. No Stafford loans, no Perkins loans, no PLUS loans, and not even unsubsidized Federal loans. Zero. Zip.

I heard student loans are really hard to get this year.
That may be true, but if you don’t spend the hour or two to fill out the FAFSA, they will be nearly impossible for you to get because you won’t be eligible for any of the federal loans.

What are the interest rates on subsidized loans?
The Stafford loan is probably the most popular subsidized loan as it has the most favorable interest rates, it’s a need-based loan and the rates are schedule to be (all loan rates are listed on Sallie Mae):

  • July 1, 2008–June 30, 2009 the interest rate is 6%.
  • July 1, 2009–June 30, 2010 the interest rate is 5.6%.
  • July 1, 2010–June 30, 2011 the interest rate is 4.5%.
  • July 1, 2011–June 30, 2012 the interest rate is 3.4%.
  • Beginning July 1, 2012 the rate is 6.8%.

Those rates may not look incredibly favorable now but remember that interest is tax deductible if you earn under a certain amount and the interest is deferred until after graduation.

I recognize that some part of that 25% of families may not be eligible for federal financial aid on a need basis, but there are plenty of non-need related federal financial aid options that everyone should try to apply for.

I am extremely thankful that I was able to get federal financial aid (and some grants directly from Carnegie Mellon) and it all starts with filling out and submitting a FAFSA.

(Photo: btreenews)


Student Loan Forgiveness Programs

My sister is a public school teacher in Boston. She’s participating in a program where her student loans will be paid off after some number of years teaching difficult students in schools in low-income neighborhoods. The arrangement works for my sister because she would be teaching anyway, though as a young female teacher the rowdy students seem like they would be a greater challenge for her, and now she’s also getting sizable debts forgiven. She hasn’t complained once yet, so perhaps things are well.

I don’t know the name of the program she’s participating in but there are several public service programs that offer the same benefits. If you’re in one of these fields, you’ll want research these more as you could get some of your loans forgiven. I don’t know if the pay for these jobs is adjusted accordingly though.

Public Service Loan Forgiveness Program

The Public Service Loan Forgiveness Program is the biggest of the loan forgiveness plans. It offers total loan forgiveness on Stafford, Grad PLUS and associated consolidation loans in the Direct Loan program if you work in a “qualified public service job” for at least 10 years and continue to make payments during that span. Ten years seems like an awfully long time. The standard payment structure on Stafford Loans is equal payments over ten years! However, typical consolidation repayment lengths are often thirty years and consolidation is always a good idea.

A qualified public service job is often determined by the employer, rather than the role you play. If your employer is a nonprofit, tax-exempt 501(c)(3) organization, you’re eligible. If it’s the federal, state, local, or tribal government, you’re eligible. Finally, if you’re in a full-time Americorp position, you’re eligible. If you don’t meet any of those, you can still qualify if your employer is a non-profit type entity that is engaged in public service but is not a political organization, religious organization, or a labor union. Rules are slated to be finalized by the Department of Education in November.


The TEACH (Teacher Education Assistance for College and Higher Education) Grant is a grant worth up to $4,000 a year if the student agrees to teach at least four years in the next eight in a “high-need” field in elementary or secondary school that serves low-income students. It’s a new program and you need to apply with your school’s financial aid office. If you’ve already graduated, unfortunately you can’t apply for this particular grant.

If you are out of school, thus ineligible for the TEACH Grant, consider asking your school district’s administration to see if they are covered under The National Defense Education Act. Under that Act, if you become a full-time teacher in an elementary or secondary school that serves students from low-income families, you can get some of your Perkins loans forgiven. It’s 15% of your loan for the first and second years, 20% for the third and fourth years, and 30% for the fifth. My sister may be in this program.

Volunteer Work

Those two programs have been getting most of the press lately but there are several other programs available. Here are some of the other options:

  • AmeriCorps: Receive $7400 in stipends and $4725 towards your loans for 12 months of service.
  • PeaceCorp: You can get deferment of your student loans and partial cancellation of Perkins Loans, 15% per year of service up to 70%.
  • Volunteers in Service to America (VISTA): $4725 for 1700 hours of service.

In addition to the programs mentioned here, there are many more specific programs.

Additional resources:


Sixty Second Guide to Stafford Loan Consolidation

Every year on July 1st, student loan interest rates are announced and with the recent rate drops there have been significant decreases for students if they opened their loans before July 1st, 2006. Before then, all loans were variable rate and loans that were originated then still carry the variable rates. That variable rate will decrease from 7.22% to 4.21%. If you had a loan after July 1st, 2006, sorry but yours was fixed and won’t change.

Student loan consolidation isn’t really a magical trick, you essentially take all of your student loans, figure out your effective aggregate interest rate, and consolidate it into one loan with one monthly payment. Before July 1st, 2006, Stafford Loans had variable interest rates so it would benefit you to consolidate (lock) your loans when the rates are low. I consolidated my Stafford Loans a few years ago at 3.25%, minus some direct debit and timely payment interest rate discounts. So, if you had all Stafford Loans and consolidated them, your rate would be 4.25% (rates are always rounded up to the next eighth of a percent) if you consolidated within your grace period. If you consolidate after that six month grace period, there’s an automatic 0.6% increase tacked on to make it 4.85%.

Finally, this is really just a PSA for folks who are getting new loans. The rate, starting today, falls from a fixed 6.8% to 6% on new Stafford Loans. Loans originated after July 1st, 2009 will be 5.6%, those after July 1st, 2010 will be 4.5% and those after July 1st, 2011 will be only 3.4%.

 Debt, Education, Personal Finance 

Student Loan Deferment vs. Forbearance

If you have a student loan and recently starting taking advantage of your employer’s education reimbursement program, you’ve probably heard the words deferment and forbearance thrown around quite frequently and you probably aren’t 100% sure what the difference is (unless you were a wordsmith/geek and knew what forbearance meant). Due to a mix up with Johns Hopkins, they reported me as less than part time and my deferment became a forbearance, which resulted in about $340 of interest that accrued during that period of forbearance (which led me to research the difference). While it’s not a thousands of dollars, I’m not paying $340 when I don’t have to (no one should).

Webster Dictionary Definitions:

  • Forbearance – a refraining from the enforcement of something (as a debt, right, or obligation) that is due
  • Deferment – the act of delaying or postponing

So, how does this affect you, a student loan holder? In both cases, you will no longer be required to make your regularly scheduled student payments. With a forbearance, the interest accrual process still continues, you simply aren’t required to make any additional payments. As interest accrues, you may decide to pay that off or not, that option is left up to you. Any unpaid interest that accrues and isn’t paid off within the period of forbearance is capitalized (made part of the principal). With a deferment, your loan is frozen in time – interest doesn’t accrue and you aren’t required to make any payments.

How do you get a deferment instead of a forbearance? Usually a student loan servicer will grant a deferment if you are enrolled in classes at least part-time, defined by the institution you’re currently attending. They do not have their own universal definition of part-time, they rely on the university or college to make that determination.

A forbearance is usually granted on request and with proof of some sort of reason. Your student loan servicer will have a forbearance process and you will simply have to follow that process, which will include an application.

 Credit, Free, Personal Finance 

Student Loans In Deferment until 2012!

One of the side benefits of taking employer-reimbursed graduate courses (other than a free education) is that my $24k or so in student loans are deferred until I complete school, even when the net cost of the courses will be negligible. I didn’t even need to do anything to get them put into deferment; ACS found out by themselves and actually caught me off guard. They put the loans in deferment until my scheduled graduation date in 2012 (hopefully it won’t take me seven years but that’s the limit at Johns Hopkins).

While in deferment, the government will cover the interest payments but I can continue to pay off the principal without penalty and without surrendering the deferment status. It’s a double bonus – not only do I get a “free” education but I also get to avoid interest on the loans. You don’t need another reason to go back to school!

 Government, Personal Finance 

Student Loan Rate Increase Revealed

As many had predicted, Federal Stafford and PLUS loan rates will increase in July. I wrote about how graduates should consolidate ASAP instead of waiting, since the process typically takes two months to complete; but back then the actual rate hike was a mystery. Luckily, with most lenders your rate is locked whenever they being the processing. Smart Money predicted that the rate would be around 5.14% which is not far off from the actual rate come July 1st: 5.3% (an increase of 1.93%). The Federal PLUS loans are going to jump 1.93% to settle in at 6.1%.

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 Personal Finance 

Consolidate Your Student Loans NOW!

JLP posted an article at AllThingsFinancial after reading a SmartMoney article about how student loans rates are probably going up. The SmartMoney article details how student loan rates (Stafford) are probably going to go up by 1% – 2% when they get reset on July 1. Read on for an explanation but the bottom line is if you haven’t consolidated yet, consolidate it before July 1st or you’ll regret it.

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