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New law gives some students a break

Relief is on the way for many federal student loan borrowers who find themselves up to their eyeballs in debt.

By Helen Huntley, Times Personal Finance Editor
Published October 7, 2007

Relief is on the way for many federal student loan borrowers who find themselves up to their eyeballs in debt. A new law will cap loan repayments in relationship to income starting in July 2009 and ultimately allow some borrowers to have their loans forgiven.

The goal is to have fewer people end up like Leslie Intriago of Tampa, who says she owes twice as much as she did when she graduated from New York University 22 years ago with a theater degree. She says she could only find low-paying jobs and her student loan payment was more than her rent. She ended up defaulting on her loans and moving in with her mother. The penalties and interest sent her balance soaring.

"The future looks very dim from where I sit," she said. "I don't see how I will ever get out of this mess."

The law offers the option of income-based repayment on past, present and future federal student loans for graduates and undergraduates. The formula takes family size into consideration, requiring no payments in some situations. For most people, payments will be capped at 10 percent of income or less. Parent loans and private loans are not eligible.

You can get a customized analysis of payment caps at www.finaid.org by clicking on "calculators" and then the "income-based repayment loan payment calculator" under "loans."

If the capped payments don't cover all the interest due, the government will cover the extra on certain subsidized Stafford loans for three years. After that, interest will accrue, but will not compound, on the principal amount.

Forgiveness of the balance will be available after 25 years of payments for all federal loans except Grad Plus and parent loans. It's not clear when the 25-year clock will start running.

A forgiveness program would have been great for a borrower like Rita Whalen of Largo, an artist who borrowed about $7,500 getting a graphic arts degree from Ringling College of Art and Design more than 20 years ago.

"I already paid back way more than I ever borrowed and today I owe as much as I did when I graduated from college," she said. "It will go on at least another 12 years."

Some borrowers who have chosen certain public service careers will be eligible for an even better deal: the possibility of loan forgiveness after 10 years. The clock on that began running until last week, which means prior payments and public service won't count. Qualifying fields include teaching, government, social work, public child care and nonprofit organizations.

This deal applies only to loans in the federal Direct Loan program, but Grad Plus loans are included. If you work full time in a qualifying field and have a Federal Family Education Loan, consider transferring to the Direct Loan program.

One drawback is that tax law treats loan forgiveness as taxable income.

The new program is very promising, especially for recent graduates, but it won't significantly ease the burden of some older graduates whose loans have ballooned.

"It doesn't address the needs of people in their 30s and 40s who have already been through the system and been hurt really badly by it," said Alan Colling, founder of StudentLoanJustice.org. He said allowing them to wipe out their loans in bankruptcy would be a better option.

"They're not interested in having student loans haunt them for an additional 25 years of their life," he said. "All of them are extremely wary of signing a new loan document which legitimizes all the penalties and fees wrapped into their current balances."

[Last modified October 5, 2007, 23:17:48]