Are you drowning in your student loan debt? Come July 1st, you may be able to get a little relief. That’s when a new income-based student loan repayment option will go into effect for those of you with federal student loans. Under the plan, monthly payments will be capped at 15% of the amount by which your income exceed the federal poverty line — regardless of how much you own. Currently, the poverty level is $16,245 for an individual.
To figure out how much you would pay, take a look at Line 37 on your 1040 Form — that’s your adjusted gross income (AGI). Let’s say your AGI is $30,000. That means your income exceeds the poverty level by $13,755. Under the new repayment program, you would owe 15% of $13,755 — or $171.94/month.
The even better news is that whatever you haven’t paid off in 25 years will be forgiven. While a quarter of a century probably sounds like forever, the prospect of loan forgiveness at the end of those years is a real blessing for those of you who want to choose a traditionally lower-paying career.
There are, however, a few catches you should know about:
- As your income goes up, so will your monthly loan payment.
- The calculation of household income will include your spouse’s salary, too. In other words, even if you are a low-paid social worker, your spouse’s high-paid attorney salary will bump up those monthly loan payments. The only way around having their income factored in is to file separately, but then you will forfeit other deductions and credits that are available only to married couples filing jointly.
- Any debt that is forgiven after 25 years will be treated as income by the IRS, so it will be subject to taxes — which you will have to be prepared to pay the following year.
- By paying less each month, your loan repayment will be spread out over more months — and each month of loan repayment increases the interest you end up paying over the life of the loan.
- You must be in good standing with your loan repayments. If you’ve ever defaulted on your loan, you won’t qualify. (A little ironic since the people most in need of income adjustment are probably those who are already struggling to meet their obligations.)
- Only federal student loans qualify for the new program. If you have a private student loan, you are not eligible for income-based repayment.