It’s not an easy time to be graduating from college with student loans. With the unemployment rate soaring toward 10 percent and the average starting salary for college graduates down 2.2 percent this year, student loan borrowers – whose average debt from student loans tops $22,000 – are now having an even tougher time affording their student loan payments.

The good news? Starting July 1, 2009, graduates with federal college loans may be able to qualify for a new government program that can reduce the monthly payments on their student loans based on their income.

Income-Based Repayment for Federal Student Loans

The income-based repayment program, created by Congress in 2007 as part of the College Cost Reduction and Access Act, will cap a borrower’s monthly student loan payments at a percentage of her or his income, when the borrower’s income is at least 50 percent higher than the current federal poverty line for the borrower’s family size.

These income-based student loan payments will be calculated as 15 percent of the amount by which a borrower’s adjusted gross income exceeds 150 percent of the poverty line.

(For individuals, the 2009 poverty line is $10,830 in all states except Alaska and Hawaii. The complete federal poverty guidelines for 2009 are available on the website of the U.S. Department of Health and Human Services.)

For example: 150 percent of the current individual poverty line of $10,830 is $16,245. If a borrower’s annual adjusted gross income is $25,000, the monthly payments on her or his eligible student loans would be capped at $109.44 – 15 percent of the difference between $25,000 and $16,245, divided by 12 months. If a borrower’s annual adjusted gross income is $40,000, the monthly payments on any eligible student loans would be capped at $296.94 ($40,000 – $16,245, multiplied by 15 percent, divided by 12).

Income-based monthly payments will be adjusted annually, based on a borrower’s federal tax return from the previous year. As a borrower’s income rises, the income-based repayment cap will also go up. If the income-based repayment cap reaches a level higher than what a borrower’s monthly payment would be under a standard 10-year student loan repayment plan, the borrower will no longer qualify for income-based repayment for her or his student loans.

Borrowers whose adjusted gross income falls below 150 percent of the poverty threshold won’t be required to make any payments on those student loans that qualify for income-based repayment.

Even if no payments are due, however, interest will continue to accrue on those college loans . Unpaid interest will also accrue if a borrower’s income-based monthly payments aren’t sufficient to cover the full monthly interest on the qualifying college loans. Any accrued unpaid interest will be added to the student loan principal and capitalized when the borrower no longer qualifies for income-based repayment.

Subsidized Interest and Student Loan Forgiveness

For those borrowers who hold subsidized student loans or a federal consolidation loan that included subsidized Stafford loans or Perkins loans, the government will cover any unpaid interest on those subsidized loans (or on that portion of a student loan consolidation that’s comprised of subsidized loans) for the first three years that a borrower is in income-based repayment.

The longest that a borrower can remain on the income-based repayment plan is 25 years. After 25 years of income-based payments, the government will forgive any remaining principal and unpaid interest – although borrowers should note that under current tax law, this forgiven student loan debt would be taxable.

Borrowers who are employed full-time in qualifying jobs in the public service sector may have their remaining student loan debt forgiven after just 10 years in the income-based repayment program, and this forgiveness would be tax-free, thanks to a ruling from the U.S. Treasury last year.

Qualifying for Income-Based Repayment

To find out if you qualify for income-based repayment on your federal college loans, you’ll need to contact your lender and provide information about your financial situation – you’ll need to demonstrate “partial financial hardship,” as defined by federal regulations.

Only federal Stafford and Grad PLUS student loans in good standing, along with consolidations of these college loans, are eligible for income-based repayment. Federal Perkins loans are eligible only if they’ve been included in a federal student loan consolidation. Other college loans are ineligible:

Private student loans. The income-based repayment program applies only to federal student loans. If you’re having problems meeting the monthly payments on your private student loans , you should contact the lenders to see if they’re willing to work out more affordable repayment plans for you. Keep in mind, though, that private student loans typically have less flexible repayment options than federal student loans.

Federal PLUS loans. If your parents took out PLUS parent loans to help you pay for college, they won’t be able to take advantage of income-based repayment on their PLUS loans. Consolidation loans that included PLUS parent loans are also excluded from income-based repayment. Any Grad PLUS loans you took out as a graduate student, however, as well as consolidations of Grad PLUS loans, are eligible.

Defaulted student loans. Your student loans don’t have to be new to be eligible – even long-time graduates may be able to qualify for income-based repayment on college loans taken out years ago. But you can’t be in default on your loans. To qualify for an income-based repayment plan, any federal college loans you have in default will need to be rehabilitated first.

By: Jeffrey Mictabor

Subsidized loans are an example of these…
For example, most student loans and loans for first time homebuyers have promotional interest rates that if consolidated would turn out more onerous. Thus, when consolidating, you should be well aware of which debt you need to consolidate and which debt you need to leave aside. Sometimes it is even better not to consolidate at all.

Subsidized Loans

A subsidized loan is a loan that features a low interest rate because the rest of the costs are paid either by a third party or waived by the issuer. These loans are intended to compensate those going through underprivileged situations or to reward a particular merit. Thus, these loans are awarded according to needs or according to merit and not on a first arrived – first served basis.

Most federal student loans that have the interest rate subsidized are awarded according to the needs of the applicants and most private student loans are awarded according to merit. In either case, the applicant will pay a significantly lower interest rate for the money borrowed than if he had applied for a regular private student loan.

Why Subsidized Loans Should be Left Aside of Consolidation

These loans carry low interest rates and it is rare to find consolidation loans carrying a lower rate than the one charged by them. Thus, it makes absolutely no sense to exchange cheap debt for expensive debt. The smart thing to do is to leave subsidized loans aside from debt consolidation and concentrate on other more expensive debt like unsecured personal loan, credit card and store card balances, etc.

There is however, a situation in which it does make sense to consolidate subsidized loans paying a higher interest rate in the process. If the monthly payments of these loans or all your loans combined are not affordable and you would benefit from consolidating with a longer repayment program and thus reducing the amount of money you spend each month, then, paying a higher interest rate as long as it is not too high may be worthwhile.

Mortgage Loans

Other loans that are not suitable for consolidation are home mortgage loans. This is because most mortgage loans carry low interest rates due to their secured nature and thus, you wouldn’t benefit from consolidating them. The same goes to most home equity loans and lines of credit that carry also low interest rates.

In this case, what you can do is refinance these loans if you need to reduce the monthly payments. You’ll get lower installments at the cost of a higher interest rate. Unless you had bad credit when you obtained them and you credit improved since then. In this case you might be able to extend the repayment program and get a lower interest rate too.

By: Kate Ross

Consolidating Federal Student Loans

Federal student debt consolidation is usually done through another federal student loan. This new loan combines the outstanding loans into a single loan and locks the interest rate. The benefits you can obtain by means of this type of consolidation are significant as all these loans are subsidized which implies low rates. If the rate is locked, this implies that you will have the same monthly installments for the rest of the repayment program while your income may improve.

Private Student Debt Consolidation

Private student debt consolidation is also done through a debt consolidation loan. However, this new loan will be a private loan. Though most of these loans are also subsidized, the interest rate charged may be higher than that of federal loans for students.

As to the requirements for approval, provided that you are up to date with the payments there won’t be a problem with approval as you are already showing that you can repay debt with higher monthly payments. However, if you have defaulted on a loan or have late or missed payments, you’ll have more difficulties during the qualification process.

Consolidating PLUS Loans

PLUS loans are awarded to parents and thus, these loans need to be consolidated separately from the loans awarded to students.

However, it is possible to consolidate them jointly if both co-sign the same consolidation loan.

However, this is not a common solution as the nature of the debts is different too and thus it is not always advisable to consolidate both debts simultaneously.
Nevertheless, it can be done and sometimes, either the parents or the graduated student, choose to consolidate through a home equity loan and unify all student debt and consumer debt into a single loan.

Joint Consolidation of Federal Loans And Private Student Loans

This is a particularly complicated issue. Private student loans can not be included in federal consolidation loans due to obvious reasons.

However, federal student loans can be included in private consolidation without difficulties.

However, is it advisable to do so? Generally, No. This is due to the fact that federal loans are subsidized loans and carry low interest rates while only some private student loans are subsidized and even those which are still charge a higher rate than federal loans. Thus, by consolidating, you would be turning an otherwise cheap debt into a more expensive one.

Higher Debt, Lower Payments

Of course, if what you need is to bring some ease to your financial life and would benefit from lower payments, private student debt consolidation offers better chances of getting longer repayment programs and thus, lower installments so your debt becomes more affordable.

By: Mary Wise