TIP OF THE WEEK - November 23

Can You Get a Student Loan Bailout?

This article was reported by Amanda Becker for "The Big Money".

A new program links payments on federal student loans to income
and forgives balances after 25 years. Those working in public service
could have their debts erased after 10 years.

If you've got a diploma hanging on your wall, chances are it didn't
come cheap. About two-thirds of the 3 million or so college seniors
who donned a cap and gown this year took on an average debt of
$22,500 for the privilege of earning that diploma. The debt graduate
and professional students incur is often tens of thousands more.

As graduates struggle to find jobs during the worst economic crisis
of their lifetime, an adviser to the secretary of education expects a rise
in the default rate on student loans, which cannot be easily renegotiated
or discharged in bankruptcy. But a provision of the College Cost Reduction
and Access Act of 2007 that reduces monthly payments for hundreds
of thousands of borrowers who qualify for the new Income-Based
Repayment plan took effect July 1.

Borrowers who work in certain public service jobs could also have the
balance of their loan erased after making qualifying payments for 10
years. (Supposedly, this costs the government nothing, since it will now
change the way it subsidizes student-loan lenders.)

So, will your student loan be bailed out? In a word: maybe. At the very
least, the IBR program will lower the monthly payments of people who
accumulated significant federal student loan debt but don't have the
income to make the payments on the standard 10-year repayment plan.
This relief may reach as many as 1 million people, according to the
Project on Student Debt. And despite lower payments, the former students
won't be paying off their loans indefinitely -- any remaining balance
will be forgiven after payments, are made for 25 years.

Basing loan payments on income isn't a new concept. For years, graduates
with federal student loans had options to reduce or eliminate their
payments, depending on how much money they made. But IBR is intended
to be more generous.

IBR caps monthly payments at 15% of earnings above 150% of the
poverty line, or $10,830 for a single-person household. Online calculators
at the free public service site FinAid.org can help you compare what your
income-based payments, income-contingent payments and income-
sensitive payments would be.

There are situations in which an IBR payment would be zero. If your
payment is so low it doesn't cover the interest accruing on your loan, the
government will pay the interest for three years on subsidized Stafford
loans, which are government- backed loans given to financially needy
students that do not accrue interest while the borrower is in school.

After that period, and for all of the other kinds of unsubsidized federal
loans, unpaid interest will accrue but will not compound. In other words,
you won't be charged interest on top of interest. Borrowers who think they
could benefit from IBR should contact their lender and ask for an
application that will authorize the release of their adjusted gross income
from the Internal Revenue Service each year.

Student loans can have a big influence on career decisions. Even former
students with good jobs say their monthly loan payments make it hard to
buy a home, start a family or save for a rainy day. The news is even more
promising for people working in public service jobs: government
employees, teachers in public schools and universities, workers at public
hospitals and anyone working for a 501(c)(3) nonprofit would qualify.
Anyone working in a qualifying job who borrowed from the Direct Loan
Program is eligible for loan forgiveness after 10 years, down from 25.

To qualify for forgiveness, borrowers who work in a public-interest
position must either have an existing Direct Loan or consolidate a federal
loan with a private lender into the Direct Loan Program and make 120
payments after Oct. 1, 2007. The payments do not have to be consecutive,
can be made while at different eligible positions and must be made on the
income-based or standard repayment plans.

At this point, the burden is on borrowers to document where they were
working during their repayment period. The Department of Education is
planning to develop a more definitive system to confirm eligibility, but
right now borrowers should keep pay stubs and tax documents that verify
their work history.

IBR and public-loan forgiveness won't be the best options for every
borrower. Some borrowers -- those able to make higher monthly payments
-- would be better served by sticking with a traditional payment plan to
avoid accruing years of additional interest. Graduates who financed their
education with private loans are ineligible entirely.  But for an MBA grad
who borrowed $150,000 planning to be an investment banker but ended
up in government service, IBR will result in payments that are affordable
on a civil servant salary.