Reader Question: Student Loan Income Repayment Option
It looks like the last two weeks have unintentionally turned in to the “Student Loan Hour” here at the Financial Aid Finder. Earlier this week, I covered the New York Times piece on student loan debt. Five experts sounded off on the question, “How much student loan debt is too much?” (Did you answer that question for our student debt poll on Tuesday? Please do that now if you haven’t already!)
You might also want to check out the Times’ follow-up to their student debt piece, appropriately titled Student Debt, Fool’s Gold? There are hundreds of reader comments that painfully, at times, illustrate the naivety with which so many students take out tens of thousands of dollars in student loans. If nothing else, it’s an eye opening read.
I have received a number of emails over the past week about a post from last Monday regarding the new income-based repayment option for federal loans, set to start on July 1st. Here is one of those emails from Richard in Richmond, Virginia.
I read with great interest your post about reducing my monthly student loan payments and I think that I qualify. I made just over $32,000 last year, and I am drowning under my monthly loan payments, which all together total over $800 a month. That’s more than my rent and utilities combined!
I’m wondering though what happens since I have loans from multiple sources. I have three loans with Sallie Mae and another loan with a different company, the name of which escapes me at the moment. Would I have to pay 15% of my salary on each? Or on all of them together? Thanks for your help!
Thank you for your email Richard. Wow, that is a lot of money every month! In fact, according to my quick calculations, it looks like you are probably spending about 40% of your monthly take-home pay just on your student loans.
As to your question, I have some good news. As long as your loans are federal student loans (Stafford, Perkins or, if you were in graduate school, Grad PLUS), the 15% will be based on your total amount of loans — not each one individually. You said most of your loans are through Sallie Mae, so those should automatically be calculated at the new amount once you apply for the program. They will send you a monthly bill equal to 15% of the amount by which your income exceeds the federal poverty level (currently $16,245).
Since you have another loan held by a different lender, you will probably need to fill out some paperwork, but ultimately your TOTAL payments should not exceed that 15% limit. Federal law requires lenders to share information about your federal student loans, so despite the bureaucratic headache, you should not be stuck with two separate 15% payments. Another option you might want to consider is loan consolidation. If you do that before signing up for the new repayment program you will only have one monthly payment to worry about.
By the way, my quick and dirty work with the calculator puts your new monthly payment at just under $200 — less than a quarter of what you’re currently paying. Wow, that’s a lot of breathing room!