A gentler option arrives for repaying student loans

Article by: KARA MCGUIRE , Star Tribune
Updated: June 30, 2009 - 11:08 PM

A new law allows repayment to be stretched over 25 years, with balances forgiven after that or even earlier for those in some public service jobs.

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Minnesotans burdened by school loans should find relief in a new income-based repayment option going into effect today.

Under the new Income-Based Repayment program, federal loan payments are based upon monthly income and family size. Most borrowers who sign up for the plan will pay less than 10 percent of their income toward student loans, according to www.ibrinfo.org, a website run by the nonprofit Project on Student Debt.

The program is designed to allow graduates saddled with more debt than they can comfortably pay off in 10 years to stretch out their payments. After 25 years, what's due on the loan, including interest, is forgiven. Graduates with public service jobs in sectors such as education and health care could see their loans forgiven after a decade of payments.

Neither program includes private loans, which students and their families are relying on more as college costs increase and the economy remains weak.

Short-term payments based on the size of the borrower's paycheck can provide cash-flow relief. But stretching out payments could result in more interest paid on the loan in the long term.

Other changes designed to make paying for college more affordable also take effect today.

Stafford rates decline

Borrowers with loans originated before July 1, 2006, will see rates on their variable Stafford loans reset to historic lows. The rates, which change yearly on July 1, drop from 4.21 percent to 2.48 percent. Recent graduates who consolidate during their six-month grace period would pay 1.88 percent. Consolidation would lock in these low rates for the life of the loan.

Stafford loans taken out after July 1, 2006, have a fixed rate of 6.8 percent. Going forward, rates on some Stafford loans are on the decline. As part of the 2007 College Cost Reduction and Access Act, rates for new subsidized Stafford Loans for undergrads dropped from 6 percent to 5.6 percent today. Rates for such loans will be reduced twice more over the next two years until reaching 3.4 percent in 2011. See www.finaid.org/loans/scripts/interest.cgi for details.

Two other changes: Origination fees for Stafford loans are now lower. Also, the maximum Pell Grant amount for low-income students is $5,350, a $619 increase.

Kara McGuire • 612-673-7293

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