The federal government has made efforts to address the recent student loan crisis by offering repayment assistance plans such as the Income-Based Repayment plan and the newly revamped version of IBR, established late last year, called “Pay as You Earn.”
These options are bringing much-needed repayment relief to students and borrowers who’ve ended up with loan payments larger than what they can afford to pay upon graduating or beginning careers. They mainly provide relief for borrowers by lowering payments based on their income, and by forgiving any remaining balances after 25 years (20 years with Pay as You Earn).
Unfortunately, there are many groups of borrowers in need of assistance who cannot take advantage of these possibilities because the eligibility requirements do not include them.
Who Gets Left Out?
There are about five groups of borrowers left out of the IBR and Pay as You Earn plans.
The first group is the borrowers that do not qualify for the “Pay as You Earn” program. In order to qualify, borrowers must not have an active student loan with a balance that was taken out prior to Oct. 1, 2007, and must be new borrowers with a new loan taken out after Oct. 1, 2011.
For example, let’s say a borrower has three loans: the first from 2001, the second from 2008 and the third from 2012. This borrower would not be eligible for Pay as You Earn because the oldest loan originated prior to 2007.
In another example, let’s say another borrower has three loans taken out in the years 2008, 2010 and 2012. In this case, the borrower would be eligible for Pay as You Earn because the oldest loan was not older than Oct. 1, 2007 and his new loan was newer than Oct. 1, 2011.
Student loan balances can last between 10-30 years, or even longer, so the Pay as You Earn program doesn’t address the majority of existing borrowers.
The second group often ineligible for the recent federal repayment reforms are the borrowers who are married and find that their spouse’s income prevents them from lowering their payments with either program.
Unless a borrower’s spouse also has student loan debt, or the borrower chooses to file "single" instead of "married" jointly on taxes, the spouse’s income will likely disqualify the borrower from any potential advantages from the program.
The third group left out from this repayment assistance is the group that has unreported substantial expenses, such as medical expenses, which were not taken into consideration when calculating their payment amount for the IBR or Pay as You Earn programs.
Both the IBR and Pay as You Earn program use a basic formula for determining a qualifying payment. The main two variables within this equation are the Adjusted Gross Income and the poverty level for borrowers' family sizes in their states. Basically, the higher the AGI, in comparison to the poverty level of a family, the greater a payment will be.
Also, note that any financial responsibilities not included within AGI on taxes will not influence the amount a borrower will be required to pay under the IBR and Pay as You Earn programs.
Another sub-group to consider is the people who have an AGI significantly above $50,000 a year. These relatively high-earning folks may find the IBR program doesn’t sufficiently address their current financial situation, when their other typical expenses are taken into account (such as a mortgage, car payment and medical expenses).
This income bracket, which probably has substantial student loan debt, is less likely to benefit from income-based programs due to the amount of money borrowers already make and the reality of their other expenses.
The fourth group that does not qualify for any federal repayment assistance programs is the private loan borrowers.
Private loans often constitute a large portion of a borrower’s student loan debt. Many borrowers are not aware of the differences between private and federal loans when they receive them. As a result, they usually do not find out how this will impact their options (and upcoming bills) until after they are out of school and in repayment.
It’s much too late for them to back out then.
Lastly, the fifth group left out from the previously mentioned federal borrower assistance is the parents of borrowers.
The IBR and Pay as You Earn programs are designed to address the financial hardship experienced by borrowers during the recent economic recession.
Loans such as Parent Plus loans, however, were not included in these plans and the holders of these loans probably needed the most help – mostly because they already had established their debt prior to the economic downturn.
Considering parents often cosign for their children’s private loans, this group is quite burdened and disregarded by the recent federal repayment revamps.
The Good News
The good news is that prior to the IBR and Pay as You Earn programs, there were already many established repayment assistance programs available, and they still exist today.
These options include, but are not limited to, deferment, forbearance, consolidation and Interest Sensitive Repayment options.
The Pay as You Earn and Income-Based Repayment programs are the most talked about in today’s news, but if you find yourself in one of the groups left out of qualifying for them, look deeper into repayment planning and consider consulting with an expert.
Jan Miller is a student loan consultant & founder of Miller Student Loan Consulting, the first & only company devoted to giving borrowers customized student loan repayment plans that fit their budget & life. EMAIL: [email protected]