Most of today’s graduates are coming out of school at the worst time in decades for getting a job. Either the jobs are scarce or they are paying much less than what a student had calculated when they took out enormous student debt. Either way, it’s going to be a lot harder for recent graduates to consolidate student loans, unless they they were smart enough to use the Federal Stafford or Graduate Plus loans, along with some other federal consolidated loans that have more lenient terms for tough times. One of the few positives about the economic situation is that it is easier to negotiate hardship deferrals and alternative payment options for government loans, unlike trying to do this with a private lender. In fact, on July 1st, 2009, new rules went into place that made it easy to negotiate an income-based repayment plan for borrowers of federal student loans.

The Income-Based Repayment Plan

In the past, if you took $30,000 in Stafford loans and then tried to pay it back at the rate of 6.8%, you’d end up with a bill of $342.48, regardless of your income level. While people who are able to find employment quickly might be able to afford that much, those students who are out of work, may not be able to swing this payment without severe hardship. The new plan takes into account a borrower’s income after graduating, and makes sure that the payment planned is no more than 15% of their discretionary income. It also takes into account that the poverty line is $10,830 per person, so your discretionary income is correlated to the amount exceeding 150% of the poverty rate, or $16,245. Using this formula, the same person who makes $30,000 a year only has to pay $171.94 month versus $342.49 per month.

As Time Progresses

You will either have income increases that allow you to pay more or go back to the conventional plan. If that never happens, there are still ways to reduce your debt, through a loan forgiveness program that takes into account years of payment and public sector service.

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