Changes Make Student Loans More Affordable

What do you get when you combine a rocky job market with soaring student debt? Student loan defaults—now at the highest level in more than a decade.

That shouldn't come as much of a surprise. This year's grads are facing hiring freezes, and many of last year's have been laid off or are still struggling to find well-paying jobs.

But the news isn't all bad: Big changes were made this month to the federal student loan programs, and they're going to be a huge boon not only to recent grads, but to current students as well.

Here's what you need to know.

Lower Payments

The biggest change is a new repayment option called income-based repayment. It will cap your monthly federal student loan payment based on income and family size. If you make less than one and a half times the federal poverty level for your family size, your payment will be zero (check the U.S. Department of Health and Human Services' website at HHS.gov to see if you qualify). Anything more will be regarded as discretionary income, and your monthly student loan payment will be 15 percent of that amount.

If the math sounds complicated, here's a good rule of thumb from Edie Irons, communications director of the Project on Student Debt: "If you owe more in student loans than you make in a year, you very likely qualify. It's designed for people with a high debt burden in relation to their income. So the less income you have, the less you have to owe in student loans to qualify."

Anyone with a federal student loan is eligible, no matter who your lender is or when you got your loan. To learn about your options, contact your lender.

If it seems like you'll be repaying forever, you won't. After 25 years, any remaining balance is forgiven. That means that, although you'll accrue more interest by stretching your repayment period with lower monthly payments, it may not matter. 

Lower Rates

You may now have a lower interest rate. If you have a variable-rate Stafford loan—you do if you got the loan before July 1, 2006—your interest rate resets annually on July 1 as long as you haven't consolidated. This year, the interest rate fell nearly two percentage points to 2.48 percent. Borrowed money doesn't come much cheaper than that.

New borrowers of subsidized (need-based) Stafford loans also have lower rates: 5.6 percent for 2009–10, compared with 6 percent for 2008–09.

More from Pell

The federal stimulus program boosted the Pell Grant to $5,350 for 2009–10. "That's the largest increase in the Pell Grant in the history of the program," says Mark Kantrowitz, publisher of FinAid.org. Pell Grants are awarded based on need and don't need to be repaid. In other words: free money. To find out if you're eligible, you must fill out the Free Application for Federal Student Aid, available at FAFSA.Ed.gov.

Find the Perks

This wasn't part of the July 1 changes, but is often overlooked: If you work full time in a public service career, your federal Stafford loan, Direct PLUS loan or Direct Consolidation loan will be forgiven after 10 years.

That means you can choose the lowest possible monthly payment—most likely by selecting the new, income-based option—and have the slate wiped clean after 10 years. 

Tips for finding the best loans and financial aid options 

The step-by-step guide to paying for college

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How much do you need to save? Use this calculator to find out!