One of the great ironies of the student-debt crisis is that only a fraction of student loan borrowers are taking advantage of a tremendous program that can significantly reduce their monthly payments. The White House, however, has announced plans that should make the student debt program far more popular.
The program goes by the bureaucratically awkward name of Income-Based Repayment, or IBR. This federal program allows borrowers to essentially repay their federal student loans based on what they can afford rather than what they owe.
Those borrowers who are unemployed or are underemployed are most likely to qualify for IBR, which can result in much lower monthly payments, or even eliminate them altogether. Students are able to cap their payments at 15 percent of their current discretionary income if they make their payments on time. Beginning in 2014, the income cap will drop to 10 percent. (See my previous post about IBR for more information.)
The federal government launched IBR in the summer of 2009, but it hasn't been as popular as you might assume. An estimated 700,000 have enrolled in the program, but far more could qualify. The Federal Reserve Bank of New York estimates that more than 5 million people are past due on at least one student loan.
Most borrowers remain unaware of IBR, but even Americans who want to participate have experienced trouble navigating and completing the application process. For many, according to a recent White House memo, the most significant challenge has been the income verification process, which has traditionally required borrowers to provide a signed copy of their income tax return.
This month the White House announced that the federal Department of Education, in collaboration with the IRS and the Treasury Department, will streamline the online application process. Borrowers attempting to enroll in IBR will be able to import their IRS tax return income data directly into the IBR application.
Bottom Line: IBR represents a tremendous safety net for struggling Americans, but it's only available for former students who borrowed through federal loans. That's an excellent reason why Americans should turn to federal loans first and, if at all possible, avoid private student loans.