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Income-based repayment plans underutilized, says study

Have you heard of an income-based repayment plan? Commonly referred to as an IBR, it is unlikely you know about this helpful tool if you're a current or recently graduated student in Seattle.

IBRs are very beneficial for students because they help them pay off their student debt in a realistic and logical way. They establish monthly payment plans for the individual so that they can stay on track with their loans. In many cases, the IBR is set up in a way that it will discharge any remaining debt after a certain timeframe (usually 10, 20 or 25 years, depending on how the IBR was drawn up). There are some thresholds and guidelines that must be met to warrant such a discharge; but it's an incredible tool that gives students a new lease on life that is not really possible through bankruptcy.

Student debt and bankruptcy have a complicated relationship. With traditional bankruptcy filings, student debt is nearly impossible to discharge. A bankruptcy filer has to prove that he or she is experiencing "extreme hardship" as a result of the debt -- a term that sounds applicable in many cases, but it is very difficult to substantiate such a claim. "Extreme hardship" has to be something, well, extreme: serious medical complications or severe conditions that inhibit a person from earning the wages they need are common reasons for extreme hardship.

But, back to IBRs: as it turns out, these loan repayment plans are not exactly being advertised with big flashing lights. According to a survey, only about 30 percent of students are using IBRs because few people know they exist.

Part of this is due to the complicated application process for an IBR, but the rules were recently laxed to help promote and expedite the program.

Source: Bloomberg Businessweek, "The U.S. Has a Really Helpful Student Loan Repayment Program -- and No One's Using It," Karen Weise, Aug. 7, 2013

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