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By Annie Wood
October 28, 2014
Caption : Enrollment in income-based repayment plans for federal student loans has increased two-fold in the past year. Keeping up with the paperwork to make it possible, however, may be a barrier.     

It is about the time of year when many new college grads have a reality check. Fall marks the end of a six-month grace period, and the beginning of perhaps a very long era: making student loan payments.

Most grads enter repayment with a large payment, somewhere in the hundreds. For the majority of borrowers making repayments, the amount is big, but manageable monthly. The problem is, paying several hundred or even a thousand dollars per month is keeping grads from launching their post-college lives.

High payments, a report from the think tank Young Invincibles shows, mean less money to spend in years after graduation, which can lead to real financial struggle. Large student loan payments can put off, downsize, or cut off purchases and investments down the road, especially when it comes to owning a home, buying a car, and getting married.

In June, President Obama signed a memorandum calling for the expansion of Income-Based Repayment (IBR) plans, which would allow about 5 million more borrowers with federal direct loans the chance to cap their loan payments to 10 or 15 percent of their income. In the last year alone, enrollment in income-based repayment plans doubled.

The concept of income-based repayment sounds pretty basic, and fair. The payment term is longer, and requires payments on time. The hope is that some of the 40 million borrowers with a total outstanding balance of $1.2 trillion in student loans can pay back their investment in their education—without being crushed financially.

However, the program has plenty of hoops to jump through. Perhaps the trickiest part is the seemingly constant paperwork involved in qualifying for these types of repayment plans.

Each year, borrowers enrolled in income-based repayment, or Pay As You Earn (PAYE), have to submit financial information. A lot can happen in a year. A promotion, changing jobs, having a baby, and getting married are just some of the life events that change borrowers’ repayment amount because of a shift in their income-to-debt ratio. Marriage is the most common reason some borrowers are seeing their debt substantially less compared to their income, if they file taxes jointly.

In order to take part in these repayment plans, borrowers’ student debt has to be high enough relative to what they are making. The Department of Education provides a repayment calculator where borrowers can see if they qualify. There are actually a variety of options for repayment plans outside of the standard ten year plan.

As the President pointed out in June with regard to the memorandum, the expansion of Income-Based Repayment and Pay As You Earn would “make progress, but not enough.” Today, IBR and PAYE programs account for just 10.5 percent of borrowers in the repayment stage of their loans.

The paperwork may be a bit of a headache, but many borrowers find the income-based cap on payments incredibly worthwhile. Borrowers can’t be booted from an income-based repayment plan for making too much, but they can if they don’t document their income each year. The benefits are clear, and even middle- to upper-income borrowers are widely eligible. The uptake in these repayment plans is slow—likely due to a lack of awareness or the bureaucratic hassle—but hopefully they can help borrowers allocate money for other aspects of their life.

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