New student loan plan goes into effect

Great news for undergraduates who rely on student loans:

The extended payment program, called “income-based repayment,” limits what borrowers have to pay to 15 percent of the difference between their gross income and 150 percent of federal poverty guidelines. After borrowers make payments on loans for 25 years, the balance is forgiven. (The Education Department already offered an “income-contingent” repayment plan, which was similar, but less generous.)

“These programs are such an enormous victory,” said Christine Lindstrom, director of the higher-education access program at U.S. PIRG, the consumer advocacy group. “It enables all borrowers to be able to face their life circumstances and know there is some flexibility and responsiveness based on what life throws their way.”

This program (put in place through the College Cost Reduction and Access Act of 2007) really is great news and will help many people.  Except a lot of medical and dental students are feeling miffed.

To pay for this income-based repayment model (IBR), funds were redistributed from the “20/220″ rule, which sunsetted on July 1.  The 20/220 rule allowed for economic hardship deferments when monthly loan payments were more than 20% of income and where the income-minus-debt-burden was less than 220% of the federal poverty line.  About 67% of incoming medical residents (aka just-graduated medical students) qualified for this economic hardship deferment.  Not loan forgiveness – just deferments and continuation of subsidizing the interest.  Which is really nice when you are carrying an average of $140,000 in debt and making $43,000 for your first 3 to 7 years post-graduation.

Yes, I’m sad to see 20/220 go (temporarily, perhaps, as there is constant pressure to revive it).  But the silver lining…

Also on Wednesday, the interest rate on new federal Stafford loans, the most widely used federally guaranteed student loan, will drop to 5.6 percent, from 6 percent. By 2012, the rate will fall to 3.4 percent, under a schedule mandated by Congress.

EDIT 10:27 am: Grrr.  The new Stafford loan interest rates only apply to undergraduates.  Can’t a grad/professional student get some love?!

EDIT 7/5/09: So I forgot to mention that this IBR only applies to federal loans.  Roughly $350/month payments on the federal loans, and then probably $300 towards private loans as well.  Add in living expenses (rent, car payment, food)…ouch.

Tags: 20/220, financial aid, student loans