Student Loan Repayment Plan Can Rescue Your Credit

Is your experience similar to my friends, Ken and Midge, whose combined college student loan debt is more than $120,000 a few years after they both graduated from college? He teaches in an urban public middle school -- a job he loves -- and she’s a copywriter. Although they consolidated their student loans, monthly payments are eating up such a large portion of their income that their lives now revolve around servicing their education debt.

As recipients of federal student loans, they will benefit from a portion of the College Cost Reduction and Access Act , which went into effect on July 1, 2009, to provide debt relief.

If you’re unemployed and unable to make a payment, call your student loan servicer to qualify for deferment or forbearance before you miss any payments. If you’re not certain who to contact, the National Student Loan Data System can help. Contacting your lender applies to all student loans, not just federal loans. Your loan will continue to accrue interest. However, it will not show up on your credit report as late or delinquent, which means you will experience no negative effects to your credit scores as the result of a deferment or forbearance.

If you can’t resolve your problem with your lender, there’s an Ombudsman, who will run interference to help you solve issues. You can also reach their office by phone: 1.877.557.2575. 

As with anything the federal government institutes, the eligibility calculations for the new student loan income-based repayment (IBR) policies are not straightforward. Based on income and family size, your student loan payments can be reduced (with no negative credit impact) to 15 percent of your annual adjusted gross income. If you have $50,000 in loans at 6.8 percent, your current monthly payment is $575.00. If you’re single, with an adjusted gross income of $30,000, your payment could be reduced to $344.00 per month. The Department of Education provides a new IBR Calculator to estimate monthly payments and eligibility. Contact your lender to apply for the program.

By allowing payments to be reduced, the time to repay will extend longer than the previous ten years. This means you will pay more interest. If your college loan debt is quite large and your income is not, you’ll want to calculate how long it will take you to pay it off at various levels. If your income remains low and your debt is not paid after 25 years, your balance will be forgiven.

To encourage employment in the public sector there is a bonus: Your remaining balance will be forgiven after ten years of reduced payments. A public service job is defined as a full-time job in emergency management, government, military service, public safety, law enforcement, public health, public education, social work, public interest law services, child care, public library sciences, or any other job at an organization that is described in section 501(c)(3) of the Internal Revenue Code of 1986. Is there a cause you’re passionate about, that is not being addressed? Consider forming your own nonprofit corporation to address the need.

Work beginning in October of 2007 counts toward these new programs so the earliest student loans will be paid off under IBR in 2017. If your loans are Federal Family Education Loans, you will be able to consolidate them into the Direct Loan Program to access this benefit. 

You will need to prove income and/or public sector employment to qualify. There will be an annual resubmission of documents to remain in the programs. And missing payments could disqualify you from continuing to make reduced payments. This brings us back to where we started. Before you’re late or miss a payment, contact your lender to receive a short-term deferment. You want to preserve your credit scores and your ability to qualify for reduced repayment plans.

For additional information, the Department of Education developed a guide for the Income-Based Repayment Plan. This program can provide you with needed cash flow relief and ways to reduce your overall student loan debt.