Gerri: President Obama recently initiated some changes to the program, calling it “Pay As You Earn.” Can you talk about those changes?
Lauren: Right now what’s available for all borrowers—past, present and future—is the income-based repayment program that went into effect in 2009. There are two improvements that will be available in the future. One is called, “Pay As You Earn.” It was announced last October and it’s still not finalized, but it will go into effect in time for people who are in school now to benefit within a couple of years. It covers people who borrowed at least one loan in 2008 or later, and one in 2012 or later.
So for current students, a good way to think about it is that it will make IBR more generous. It will make the payment cap and the maximum payment you have to make even lower, and it will forgive any remaining debt after 20, rather than 25 years. Those same terms will apply with borrowers who took out their first loan during or after 2014. So all new borrowers starting in 2014 will have access to a more generous version of IBR. But IBR right now is still pretty generous and can really help people stay out of delinquency and default.
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Gerri: What about borrowers who have some loans that are maybe years, or even decades, old that they’re still trying to cope with. What options do they have?
Lauren: If a borrower is not in default they could have access to income-based repayment. They just have to meet the basic debt-to-income criteria. The nice thing about income-based repayment or IBR is that it applies to those past, present and future borrowers of federal student loans.
Gerri: What if you’re in default? Are you eligible for IBR?
Lauren: You’re not eligible for IBR if you’re in default and it takes nine months of non-payment to default on the federal student loan. Hopefully, more people will find out about IBR and use it before they reach that point because once you do default on a loan, the consequences are quite severe.
Gerri: I interviewed a woman who had student loan debt cancelled and then ended up with a big tax bill as a result of the cancellation of debt income. What about with IBR? If you have student loans forgiven at the end will you have to pay taxes on the forgiven amount?
Lauren: Under current law, it would be taxable. However, we worked very hard and have a lot of support in Congress fixing this problem. I’m confident we’ll get it long before anyone qualifies for forgiveness under IBR. Public service loan forgiveness, if your debt is forgiven, is not taxable.
[Related Articles: 8 Ways to Ease the Student Loan Burden]
Gerri: How long does it typically take to get approved for IBR?
Lauren: We have heard everything, from a couple of weeks to three months. And there have been some instances of lost paperwork. It’s really important for borrowers to speak up and, if they are having any problems, file a complaint with the Consumer Financial Protection Bureau because they will track and help figure out where the problems are.
Overall, though, we know that more than 630,000 people are now enrolled in IBR and the pace is picking up. So even if it takes a little while, just keep in touch with your servicer and make sure you’ve got all your paperwork in, keep copies of everything that you submit and when you sent it and you should be alright.
Listen to the entire interview with Lauren Asher, including tips for borrowers with private or parent student loans:
Listen to the interview online here.
You can also listen or download the podcast on iTunes.
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