New Financial Aid Benefits Allow Borrowers to Pay Back Loans Based on Their Income
WASHINGTON, D.C. – Starting today, federal student loans will become more affordable to repay as a new Income-Based Repayment (IBR) program takes effect. IBR will allow borrowers to cap their monthly loan payments based on how much income they earn. This program, in conjunction with a lower interest rate on subsidized – or need-based – student loans and an increase in the Pell Grant scholarship, will help make college more affordable and help alleviate devastating student loan burdens for millions of students, recent graduates and other borrowers.
“This help couldn’t be coming at a better time for borrowers in this tough economy, or for current and future students facing an escalating college affordability crisis,” said U.S. Rep. George Miller (D-CA), chair of the House Education and Labor Committee. “These benefits will make a serious difference for students and families working very hard to pay for college, and will provide millions of borrowers more flexibility in choosing a career they truly desire rather than one made necessary due to crippling student debt.”
“Under this new program, students no longer have to choose between serving their nation and communities and tackling a mountain of college debt,” explained U.S. Senator Edward M. Kennedy (D-MA). “Our nation is better and stronger when the best and brightest young Americans choose careers in public service.”
Under IBR, borrowers have a portion of their income protected from loan repayment (up to 150% of the poverty level for their family size) which means graduates can afford to take jobs at lower salaries. Borrowers are required to pay no more than 15% of any income above that threshold. This program will allow borrowers to devote the first part of their paycheck to covering core costs like housing, food and transportation. After 25 years of lower payments, borrowers’ remaining loan balances, including interest, will be completely forgiven. For borrowers in public service fields, like nursing, public interest law, or non-profit work, their debts will be completely forgiven after 10 years of service and loan payments.
The chart below illustrates the IBR benefits.
Income Based Repayment was enacted by the 110th Congress in 2007, as part of the College Cost Reduction and Access Act. That bill invested an additional $20 billion in federal college aid for families at no additional cost to taxpayers. In addition to creating IBR, the law also halved interest rates on need-based federal student loans in equal steps over four years – making these loans more affordable for low- and middle-income students. Last July, the first of these four cuts took effect; today the second cut kicks in, as interest rates drop from 6 percent to 5.6 percent. The rate will continue to drop until it reaches 3.4 percent in 2011. Nationwide, about 5.5 million students take out these loans each year.
As a result of investments made by this law and more recently by Congress and the Obama administration, millions of low-income students will also receive a Pell Grant scholarship of $5,350 for the coming year. This is more than a $600 increase above last year’s award.
To view a fact sheet on these and other benefits, click here.
For more specific information on how the new Income-Based Repayment program will work and who will qualify, click here.
For more information on the College Cost Reduction and Access Act, click here.