By Brian Shlonsky

Two new federal loan programs will go into effect July 1, offering some students debt forgiveness.

The College Cost Reduction and Access Act of 2007 established the Income-Based Repayment plan and the Public Service Loan Forgiveness program, which could significantly reduce monthly student loan payments when used together for students pursuing public service careers.

“A lot of people in the government have been talking about students having too much debt,” said UK student loan counselor Darlene Mickey. “They are trying to streamline re-payment by offering these new plans.”

According to the Smart Student Guide to Financial Aid’s Web site, the IBR plan is intended to make the repayment of student loans easier for students who plan on pursuing lower-salary careers, especially in public service. The IBR caps monthly payments at a percentage based on the borrower’s income, family size and total amount borrowed, modifying each year with changes in annual income and family size.

Public service careers include law enforcement, public safety, teaching, nursing, social work and public defenders.

Under the IBR plan, students are given a maximum of 25 years to repay the debt.  Any debt that remains after that point is forgiven; however, the borrower is required to pay income taxes on the amount that was forgiven.

“Students could have considerable savings with this plan, but you also have to realize that the longer it takes to pay back, the more students pay in the long run because you have to pay interest,” Mickey said. “The plan doesn’t spell out that the longer you pay, the more you pay in interest.

“Even though the excess amount is forgiven after 25 years, students still have to pay the taxes on it.”

The government will pay the unpaid interest on subsidized Stafford loans for the first three years if students’ payments fail to cover the interest.

Mickey said the students who graduated in December, those who will graduate in May and those who have withdrawn from school would be eligible to take advantage of the IBR plan July 1.

The Public Service Loan Forgiveness program pardons any remaining debt after students have worked full-time for 10 years in a public service career, having also made 120 monthly payments on their Federal Direct Loan.

While making the 120 monthly payments, students can use IBR, Income Contingent Repayment or standard repayment to count towards Public Service Loan Forgiveness.

The Smart Student Guide to Financial Aid recommends students use IBR when it becomes available on July 1 in order to have the most amount of forgiveness after their 10 years.  Visit www.finaid.org for more information.