Income-based repayment on student loans is not all it's cracked up to be

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The new income-based repayment program for federal student loans has been getting a lot of favorable press lately, and not entirely wrongly.

Here's how it works: If you have federal student loans and are having trouble making payments, signing up for the IBR program will cap your monthly federal student loan payments at 15% of whatever your income is over $16,000 per year. If you earn less than $16,000, you don't have to make any payments. Any money you owe after 25 years is forgiven.

The downside to the program is that unless you were going to take more than 25 years to pay off your loans, that second part won't help. It will just minimize your monthly payments while increasing the amount of interest you'll pay over the life of the loan.


In other words, it won't keep you out of the poor house. It'll just leave enough room for a few mocha lattes on the way there.

The debilitating impact of student loans on your net worth will be left very much in tact. It's a stop-gap measure to help people avoid defaulting on loans, nothing more.

The other problem with the program is that it does not apply to private student loans -- the most insidious form of student loan debt, and the kind most frequently held by people with large amounts of student loan debt because of caps on how much you can borrow under the federal programs.

Check out IBRInfo.org for more information and to see whether you qualify and whether it will help lower your payments.

But please keep this in mind: If you can possibly afford to make your current monthly payments, you should not sign up for IBR. It will lower your payments but cost you more in interest over the long-term.
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