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Saving on student loan is test in itself

The Baltimore Sun

If you're repaying student loan debt, a bill passed by Congress this month could help ease the burden. But it's a good thing you've earned that college degree: You'll need all your wits to sort out the best option for you.

The legislation, called the College Cost Reduction and Access Act of 2007, introduces loan forgiveness for graduates in a broad category of public service jobs.

Essentially, if you work for the government, a nonprofit organization or the military, the government will forgive your outstanding balance once you have made 120 loan payments while in that role.

On top of that, people who carry a high debt load but make a low salary will be able to reduce their monthly payments. Referred to as income-based repayment, this new program will cap your monthly bill at 15 percent of your adjusted gross income, minus 150 percent of the federal poverty level. So if you graduate with $20,000 in debt and your AGI is $30,000, under a standard 10-year repayment you would owe $230 a month (assuming a 6.8 percent interest rate). But with income-based repayment, you pay $184 a month.

The current income-contingent repayment plan is not as generous, and the government hopes the break will help more debt-laden graduates, especially those with public service jobs.

"I think Congress recognized there was an increasing crisis in the public sector," said Philip Schrag, a Georgetown University professor who wrote about the bill in the Hofstra Law Review. "People going into this work are leaving after a year or two because they can't afford to stay."

But here's where the good news gets mired in tricky details.

Payments to qualify for loan forgiveness will start to be counted on Oct. 1. But your loans must be issued through the Federal Direct Loan Program. If you borrowed from a private lender, your payments won't be counted.

Not fair? Well, you can rectify the situation by lumping your debt into a Federal Direct Consolidation Loan (find information at, but the new law says you can't do that until July 1, 2008.


There's one exception: You may qualify for a direct consolidation loan before July 1 if you sign up for income-contingent repayment and find the terms with a private lender to be "unacceptable," said Mark Kantrowitz, founder of

But let's say you consolidate next summer. The income-based repayment plan doesn't kick in until July 1, 2009. So even though you are racking up months toward loan forgiveness, you don't benefit from a reduced monthly payment until the following year.

Even if you have graduated, you don't have to wait nearly two years to find some debt relief.

Although the current income-contingent repayment plan is not as good a deal, sign up for it anyway if you are struggling with payments. The plan caps your monthly obligation at 20 percent of your AGI, minus the federal poverty level.

If you have consolidated, you can reconsolidate into a direct loan, but most graduates will have to wait until July 1.

There is one more, big caveat: Even though your loan is forgiven after 10 years, the law says that you have to pay income tax on the outstanding balance in the year that it is forgiven.

"That will be a sudden tax bite, and Congress needs to fix it," Schrag said.

For big earners

Even graduates making good salaries and working outside the public service area need to pay attention: Congress is financing the new benefits by cutting subsidies to lenders. And to make up for lost revenue, lenders are expected to reduce interest-rate discounts typically awarded for on-time and automatic payments.

So if you're planning to consolidate your loans, do so before Oct. 1 to lock in steeper discounts.

Carolyn Bigda writes for Tribune Media Services.

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