The federal government’s new income-based repayment program, which will cap monthly payments on student loans, went into effect Wednesday.
The program is part of the College Cost Reduction and Access Act authored by Rep. George Miller, D-Calif., who is the chair of the House Education and Labor Committee.
The program applies to federal Stafford loans, PLUS loans and consolidation loans that are not in default.
“These benefits will make a serious difference for students and families working very hard to pay for college,” Miller said. “[The loans] will provide millions of borrowers more flexibility in choosing a career they truly desire rather than one made necessary due to crippling student debt.”
The program protects a portion of a graduate’s income equivalent to 15 percent of their disposable income.
UT physics senior Andrew Caloca said he expects the program will help him if his job outlook remains grim.
“I think it’s good for [students] because if we can’t find a job immediately, or if we have something that pays less than expected, we won’t have this burden on our shoulders,” Caloca said.
Rep. Henry Cuellar, D-Texas, helped author Texas education grants and has pushed for the act since its inception.
Coupled with this program will be a series of interest-rate reductions on need-based federal student loans. According to Cuellar, interest rates dropped from 6 percent to 5.6 percent Wednesday and will drop to 3.4 percent by 2011.
Cuellar said the program was developed to help middle-class families.
“If you are poor, there is money out there, if you are rich, you don’t have to worry about paying for college,” Cuellar said. “We wanted to help the working middle-class, and the way we can do it is by cutting down the interest rate.”
Thomas Melecki, director of Student Financial Services at UT, said because students have so long to repay their loans, their tendency may be to prolong their payment plans despite the accruing interest. Any benefits of the program may be negated compared to a standard 10-year loan.
Melecki said the program keeps in mind that students may be entering into low-paying occupations.
“Under IBR, monthly loan payments would be approximately $110 for an unmarried student who borrows $21,000 in federal Stafford loans and then earns $25,000 per year after graduating,” Melecki said. “Under a standard repayment plan, this student’s monthly loan payments would be approximately $241.”
After 25 years of on-time payments, if a borrower still has a balance due, it will be forgiven. For borrowers who have pursued a career in public service such as nursing, public interest law or non-profit work, the debt will be forgiven after 10 years of loan payments. The remainder that hasn’t been paid off will be treated as taxable income.
Elisheba Evans, a former UT English student who transferred to the University of North Texas, is paying off her UT-Austin student loans.
She said the program’s forgiveness clause will benefit her in her career choice as a science teacher.
“It’s good that there is a system in place to reward people going into [public service] because you aren’t making that much at all,” Evans said.
Cuellar said although the federal government will see expenditures, the program will benefit the economy with disposable income.
“The more kids get into higher education, the better it is for our economic engine,” Cuellar said. “The more disposable income available, the better it is for our economy.”
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