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Digging out from college loan debt

Annie Zelm • Dec 18, 2011 at 1:00 PM

Before they even have a job, buy a house or start a family, many college graduates already carry hefty baggage.

Some equate it to carrying a house on their back, although they can't live in it for the next 20 years.

The student loans they obtained to fulfill a dream have turned into a nightmare that follows them well into their 30s, often putting other plans on hold.

But for some, there's hope.

Radhika Singh Miller is program manager of educational debt relief and outreach for Equal Justice Works, a nonprofit that advocates for laws to help debt-ridden students.

She said it's important for students to be their own advocate.

"It's not going to help with everything, it's not going to help with everyone," Singh Miller said. "But there's some help out there, and you should know about it."

Singh Miller took some time to hammer out the particulars of the new plan:

Q: Who can sign up to get some relief?

RSM: Income-based repayment is available only for those with federal loans.

To get in, you previously had to owe more than 15 percent of your annual income. Now it will be 10 percent.

And once you're in, payments on your loan will be capped at 10 percent. Under the old program, your loans would be forgiven after 25 years as long as you've continued to make your payments. The new program changes that to 20 years.

It's only available to "new borrowers" -- those who borrowed their first federal loan in 2008 or later, and will again borrow in 2012 or later. That could change in the rule-making process, which will start in January.

From our estimates, there's a huge difference between 15 percent and 10 percent. Someone who could have had a $360 monthly payment under the 15 percent rule could have something like a $240 payment. Others who borrowed before 2008 can still sign up for the current income-based repayment program.

Those who work in public service or at a nonprofit are also eligible for an income-based repayment program that forgives their loans after 10 years. That hasn't changed.

Q: So the program is based on income. But what if you don't have any or you're making so little you can't make any progress?

RSM: The income-based repayment program is based on what you make and your family size, so it's actually possible to have a zero-dollar payment (that counts toward your 20-year loan forgiveness). Anyone who's living by themselves making $10,000 to $15,000 will probably have a zero-dollar payment, as well as someone who has a family of four with an income of around $30,000. When your income changes, your payments will go up.

Need help?

• Students can find out if they're eligible for the income-based repayment program or loan consolidation at studentaid.ed.gov, or by calling the Federal Student Aid Information Center at 1-800-433-3243.

• To figure out how much your new loan payments could be or how much you'll need to borrow as a new student, try the loan calculators at finaid.org.

Loan language

Navigating your way through the jungle of student loans can be confusing. Here are some tips for new borrowers, courtesy of the Project on Student Debt:

• Federal loans are the safest place to start. Interest rates on federal loans don't change over time and aren't affected by your credit rating. Federal loans also come with some guaranteed borrower protections in case you're unemployed or have other financial problems after college.

• Perkins and Subsidized Stafford loans are the safest and most affordable federal loans. If you qualify for them, they're a great deal, because the government pays all the interest while you're in school. The interest rate for Perkins loans is fixed at 5 percent, and for Subsidized Staffords it's fixed at no more than 6.8 percent.

• Unsubsidized Stafford loans are the next best option, and they're available to everyone, regardless of income. Interest builds up while you're in school, but you don't have to start making payments until six months after you graduate, and you still get the federal borrower protections.

• PLUS Loans, which are only for parents and graduate students, have a higher interest rate of up to 8.5 percent, but they are generally a better deal than private loans.

• Private student loans, sometimes called "alternative" loans, are much riskier. They're a lot like credit cards: even if they start at what seem like low rates, those rates can shoot up at any time, and the interest costs can quickly surpass whatever you borrowed to begin with. Also, they don't have the borrower protections that come with federal loans.

• Beware of private loans in disguise: some schools put their own name on private loans, or the loans may have other brand names that make them look safer than they really are. Lenders often offer both federal and private loans, so make sure you know what you're getting before you sign on the line.

• If you find a good rate on a private loan, keep talking to other lenders, and see if they will beat that rate. Make sure you get the final deal in writing, and that you understand the limitations and restrictions.

Information courtesy of The Project on Student Debt, a nonprofit initiative staffed by employees of the Institute for College Access & Success.

To have the rest of your questions answered and to read about local graduates' debt struggles, pick up a copy of Sunday's Register.

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