New program may lighten student loan debt burden ASSETS & VALUES

Program may lighten student loan debt burden

While job hunting in one of the worst economies on record, college graduates can’t afford to be too choosy about the work they will do.

Many used student loans and credit cards to pay tuition and other college expenses and need paychecks to start whittling away at their debt.

Fortunately for them, the federal government put in place some changes last week that make it easier for college students and graduates who finance their educations with federal loans to pay back borrowed money.

On Wednesday, the federal Education Department launched the Income-Based Repayment plan, a program that adjusts the size of federal student loan payments based on a borrower’s paycheck and family size.

Repayment formula

The repayment formula is based on 150 percent of the federal poverty guidelines for the borrower’s family size. Under the program, the borrower pays no more than 15 percent of the difference between that income threshold and his or her gross income.

The new program also sets the payment period to 25 years. If by that time the debt is not paid off, what’s still due on the loan, including interest, is forgiven.

Forgiven, in this context, means the remaining debt is canceled.

When I explained that to Ahmad Hygh, a junior at Prairie View A&M University, he cheered.

Hygh already owes $24,000 in federal student loans. His plan is to graduate with an English degree and use it to teach high school students about literature and language, no matter how much he owes.

“I’m positive I can be a teacher, and I’m not going to let my debt load stop me,” Hygh said. “I have so much other stuff to worry about than how much I owe the government.”

Loans and a home

On a teacher’s salary, Hygh plans to pay off his student loans and purchase a home in the next five years. But he hasn’t mapped out yet just how to get all of that done.

“If the loans aren’t paid off by that time, I might have to wait on getting the house,” he said.

The new income-based repayment plan would make juggling all of his financial goals less costly.

And when he follows through on his plan to be a teacher, he may also qualify for the federal Public Service Loan Forgiveness program that was also started last week.

Graduates who do public service work and make monthly federal loan repayments for 10 years can have the rest of their federal debts erased.

Direct Loan requirement

To participate in the program, however, you have to get your loans through the federal Direct Loan program, or shift your debt to that program — in which money comes straight from the federal government and not through banks, Sallie Mae or other lenders.

By combining the income-based repayment plan with the public service program, Hygh may find it possible to repay a big chunk of his debt and save money for a down payment on a home.

Nothing’s guaranteed, but at least the federal government has given him a better chance at actually achieving the old American Dream.

Shannon Buggs has completed the financial planning certificate program at the University of Houston. She welcomes comments and suggestions but cannot offer specific advice about individual circumstances. Contact her at shannon.buggs@chron.com.