One of the most frightening things about student loans is the repayment. Many students do not fully consider the size of the monthly payments that they are accruing when they initially sign for student loans. It can literally be years before they get a full accounting of how much they owe in student loans and how substantial the monthly payments will actually be. Since these payments start no more than six months after a student exits college and (hopefully) starts their career, astronomical monthly payments can permanently cripple living situations, credit reports and even employment options.

To address these issues, Direct Loan and FFEL lenders have created a new program called Income Based Repayment (IBR). This program opened for its inaugural run in July of 2009, and many people are not aware of this option because it was not widely publicized. IBR is designed to enable loan repayment amounts to be set based upon your income and family size. This will prevent crippling monthly payments and potential foreclosure or even poverty due to overblown student loan payments. A sliding scale is used to determine how much your loan payments will be once you have established a debt-to-income ratio, which is simply the amount of money that you make versus the amount of money that you owe each month.

Here are the basic numbers for the IBR program:

• If you earn below 150 percent of the poverty level for your family size, then you pay nothing on your student loans.
• If you make more than 150 percent of the poverty level for your family size, then a payment must be established.
• The payment will be based on the amount over 150 percent of the poverty level that you make, but it cannot be more than 15 percent of the amount of money that you make over the poverty level.

Let’s set up an example. Remember that these are entirely fictitious numbers. The poverty level changes from year to year and also fluctuates based on how many people are in your family – children, adults and dependents. For the purposes of example, let us say that the poverty level for your family is $500.00 per month. That means that 150 percent of the poverty level (500.00 multiplied by 1.5) is 750.00 per month. Therefore, if you make less than 750.00 per month, then you will not be required to repay your student loans for the duration of time that your situation in the program remains in this state. However, say you make $1000.00 per month. This is more than $750.00. It is $250.00 more. This means that you are eligible based on the IBR scale to start repaying your loan. However, the maximum amount that you can be required to pay each month is 15 percent of $250.00, or $37.50 each month. You will personally establish this amount with an IBR program representative.

Please remember, that is only an example. Those numbers are simple and not representative of real-world numbers.

Once you have entered the IBR program, your payment amount will be revisited and adjusted each year as necessary based on changes in your income and family size. Currently you and your spouse’s incomes will both be used when determining IBR payments, but if you both have student loans then both sets of loans will also be factored in. The Department of Education will address this potential complication in 2010.

There are some basic requirements for entering the IBR program:

• You must have student loans with FFEL, Direct Loans or other forms of federal loans. These include grad PLUS loans but exclude parent PLUS loans.
• You cannot be in default on any of your loans. You can, however, have been in default and gotten out of it. There are a variety of ways to deal with student loan default, and you will often find that simply contacting the lender directly will go a long way toward resolving the issue if you have a proposal that appears viable in terms of making a commitment and future payments.

If you are eligible for IBR, then you will glean some significant advantages as long as you remain current in the program. The most significant is that if you make your payments for 25 years, any remaining debt will be cancelled. However, currently the cancelled debt can be taxed by the federal government as income. This is likely to change in the future however as the program is refined over time.

Here are a few other advantages to enrolling in IBR:

• You will almost certainly be eligible for lower payments if your loan amount exceeds 10,000 dollars and, in some cases, even if it does not.
• You can carry over payments made in the Income Contingent Repayment (ICR) plan.
• The government may pay your interest if your IBR payment is less than the monthly interest that accrues on the loan.
• If you are in a public service job you may be eligible for cancellation after 10 years if you are using IBR on a Direct Loan.

Of course, there are also some problems to factor in:

• You may or may not owe taxes on the cancelled loan amount.
• Ultimately, you will pay far more interest because your loan repayment period is longer.
• You must be meticulous in your annual documentation and reports to IBR.

Despite these potential complications, IBR represents a real ray of hope for student loan borrowers who feel (and legitimately so) that they may never manage to crawl out from under their student loan debts. If you are concerned about the welfare of your family because of escalating or inflated student loan payments, then IBR could be the solution to your problems. Do not be afraid to contact your lenders directly or the IBR program itself. Counselors and advisors can help you determine what type of eligibility you will have and how best to utilize this exciting new student loan repayment option.