Pay Back Student Loans with an Income Based Repayment Plan

The majority of young people can’t afford to enter higher education without taking on at least some college student loan debt. According to FinAid, 65.6% (almost two-thirds) of 4-year undergraduate students left university with owing money. Excluding PLUS loans, the average amount of student loan debt owed by seniors stood at $23,186. Whilst repaying this money can usually be deferred for up to 3 years, this is not a long term solution. Student loan default doesn’t provide the answer either. In fact, defaulting will result in fewer federal options being available to deal with any future financial difficulties.

Why College Student Loan Debt is Difficult to Eliminate

Unlike unsecured loans and credit cards, it is not normally possible to file for student loan bankruptcy in order to clear college loan debt. This is because allowing this would open the floodgates for unprecedented levels of bankruptcy amongst desperate graduates. The only exception to this rule is those who have a permanent illness that seriously effects their earning potential. It would need to be demonstrated that student debt repayment would bring serious financial hardship on a family. As it stands under the current laws, any money that is borrowed to fund university will need to be repaid.

An Income Based Repayment Plan to Clear College Loan Debt

The College Cost Reduction and Access Act of 2007 introduced a new method of student debt repayment, the income-based repayment plan. It came into force on the 1 July 2009 and now allows a graduate to repay the money they owe at an affordable rate. The graduate will pay 15% of the difference between the poverty line income ($10,830) and their own annual income. This means that, if that person earns $30,000 a year, they will make a monthly college student loan debt repayment of just $239.63. Although it will be taxable, after a period of 25 years, any outstanding debt will be written off.

Pay Back Student Loans at an Affordable Rate No matter how bad things may seem, never default on a student loan as this doesn’t provide the answer. Always talk to the lender. An income based repayment plan can provide significant student debt relief because it not only allows that person to reduce their repayments, there is also light at the end of the tunnel. Although any remaining college loan debt will be written off after a period of 25 years has elapsed, under existing Inland Revenue Service (IRS) rules, it is still taxable.

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