Lower your student loan payments

The government’s new Income Based Repayment Plan may allow you to write a smaller monthly check for your student loans starting July 1.

The program will be open to graduates with one of the major types of federal student loans — Stafford, Grad PLUS or Consolidation loans made under either the Direct Loan or Federal Family Education Loan (FFEL) program.

You can have used the loans for any type of education, including undergraduate studies, graduate work or even job training. Parent PLUS loans and loans in default aren’t eligible.

To qualify, your federal student loan debt needs to be considered high in comparison to your income and family size.

To see if you might be eligible for the program, you can enter your salary, number of family members and current loan interest rate into the Department of Education’s Income Based Repayment calculator.

The calculator will estimate what your monthly payment would be under the program. If it’s lower than what your payment would be under a 10-year standard repayment plan at your current rate, it will tell you that you should be eligible for the income based program. To apply, you’ll need to contact your lender.

For example, if you’re single, make $30,000 a year and have a $25,000 student loan, your income-based payment would be $172 a month.

That’s a $116 savings over a standard 10-year repayment plan, which, with an interest rate of 6.8%, would give you monthly payments of $288.

If you have a family of four, make $50,000 a year and owe $20,000, your IBR payment would be $212 — compared to $230 on a 10-year repayment plan.

In the current economy, the program may be a huge help for recent grads who are earning less than they’d planned.

Another bonus: You can participate in the program for as long as you need to. In fact, if it takes you 25 years to repay your student loan debt under the income based plan, the government will cancel any remaining balance.

However, there is a catch. You’re essentially extending the repayment period of your loan — which means you’ll pay more interest over time.

If your monthly income-based payment doesn’t cover the interest that accrues each month, the government will pay it on Subsidized Stafford Loans for up to three consecutive years from when you start the program.

But after three years, the interest that accrues will be added to the principal, which is what your lender will use to calculate the amount of interest you’ll pay in the future if your income ever rises to the point that you’re no longer eligible for an income based repayment.

In addition, you have to submit income and family size documentation each year to reset your payment. If you don’t, it will automatically go back to the standard 10-year repayment amount.

Click here to find out more about the Income Based Repayment plan.