Did you see it? Last week in DC something rare and really cool happened. Congress passed a major piece of public policy and sent it to the president’s desk – by an overwhelming bipartisan majority. And the piece of public policy that went through? It was none other than the much needed student loan bill. Details of which have been all over the news and the internet in recent days, but just to give you a quick primer on what the basics were:
- Undergraduates this fall will be able to borrow at a 3.9 percent interest rate for subsidized and unsubsidized loans.
- Graduate students will borrow at 5.4 percent
- Parents will borrow at 6.4 percent
- Everyone will save about $1500 per loan
Now, this is all great news, but what if you don’t fall into any of the above categories? What if you’re done with school and are now getting ready to enter the real world? Take heart, there is a solution for you as well that doesn’t involve the Bank of Parents. It’s called Income-Based Repayment, or IBR. And it was kind of lost in the recent student loan debate. But it certainly was not lost on us. Here’s a look at how IBR could be a great remedy to a recent grad’s burden.
IBR Not RBI…And You Should Know About It
First, if you saw IBR as RBI, that’s a whole different discussion. We’re not talking baseball here, we’re talking about finances, which is way more exciting these days. Income-based repayment means that a graduate commits a given percentage of his or her annual income to pay down the loan. And if that sounds like something out of left field, it shouldn’t. The option has been around since at least 2007. The problem is, most student borrowers ignore it despite its advantages. “The program is so new, it hasn’t made it into the collective consciousness of schools and borrowers,” said Jason DeLisle, an advocate of IBR at the New America Foundation. Case in point: educational institutions estimate that out of 38 million graduates carrying debt, only about 1 million use IBR. So where’s the disconnect?
How Does IBR Work?
That question is the answer. A lot of students simply don’t know what it can (and cannot) do for them. So let’s pretend that this entire section is filled with impossible-to-understand equations detailing the IBR calculator and how much you’ll pay down each month relative to your income. Then, let’s break it down into laymen’s terms for everyone to understand. IBR has two key advantages:
- First, loans are forgiven after you repay for 25 years even if your loan is not completely paid off.
- Second, if you have a subsidized loan and your monthly IBR payment is less than the interest that accrues, the government will pay the difference for the first three years that you are repaying. Which simply means your overall balance won’t increase.
That second point is the closest we get to a word problem. But for more detailed information about IBR and what it does and doesn’t do, you can read up on it in its entirety right here.
If It’s So Great, Why Isn’t It More Successful?
Two words: the economy. Wes Huffman, the Director of Research and Communications at Washington Partners, LLC, a government affairs and public relations consulting firm with expertise in education policy, said that “Despite the availability of these repayment options, federal student loan defaults continue to increase.”
This is largely due to high young adult unemployment, a weak economic recovery, and an aforementioned lack of outreach to students educating them about the program. Additionally, the lengthy application process can also be a roadblock. “There are efforts to make the process smoother, but currently in order to qualify, borrowers must submit, and the Department of Education must accept documentation of their income and qualify the borrower for…” literally a bunch of other stuff that will make you want to buy a vowel way more than an education. Huffman may not have said that last part, but you get the gist of it. Just make sure you go over all the details at the links provided above.
Repaying student loans is a burden shared by literally tens of millions of recent graduates. And because today’s economy has hit young people particularly hard, it’s important to give yourself as many options as possible to repay it. Understanding the policies and conditions of your loan, staying in touch with your lender and keeping up on current events are ways to ease some of the stress. And always be sure to read up on both the pros and the cons of whatever program you’re interested in so that you can make sure, above all, that it’s the best solution for YOU.