Catherine Terrell graduated from law school in May 2010 and found herself with $110,000 in student loan debt. That debt made for $1,100 in monthly student loan payments — a massive burden for someone fresh out of law school.
To make things easier, she signed up for income-based repayment, a program that caps loan payments for federal student loan borrowers who are of sufficiently low income.
"When you've got a mound of debt looming and no definitive job prospects, even though you have the skills and things [and] you know you're going to be making money one day, it's kind of a relief," she says.
Terrell was fortunate to get a job before her six-month student loan grace period was over, as an attorney with the federal government in Cincinnati. Still, the program meant an extra $700 per month in her pocket at first. Now, with the program taking her income as an attorney into account, Terrell says the program continues to save her $225 per month on what she would otherwise pay.
According to the Consumer Financial Protection Bureau, student debt has topped $1 trillion. And figures released by the Federal Reserve Bank of New York on Nov. 27 show that outstanding student debt was nearly $300 billion larger than credit card debt as of the third quarter of this year. Especially at a time that the job market is rough for recent college graduates, that can mean plenty of hardship. According to many experts, there are plenty of people out there with options to save them from default and delinquency, but they have no idea that those choices exist.
The Department of Education says that of 36 million current federal student loan borrowers, 1.1 million were on income-based repayment as of August 2012. There are an additional 474,000 using income-contingent repayment, a similar program that covers fewer types of loans. The department does not have data on how many people are eligible and not using the programs; use is based on income and poverty level, so knowing that number would require knowing the family sizes and annual incomes of all of those borrowers.
Still, there is evidence that these repayment programs are underused and, indeed, that many borrowers are unaware that they exist.
"Certainly more people need to know about IBR and could be benefiting from IBR," says Lauren Asher, president of the Institute for College Access and Success, a nonprofit that promotes higher education availability. "Defaults are rising even during the period that borrowers have access to IBR. Far more people could be benefiting from it right now."
Indeed, student loan delinquency has climbed substantially, even since the income-based repayment option became available on July 1, 2009. In the third quarter of that year, just below 8.5 percent of balances were 90 or more days delinquent, according to the New York Fed's data. Now, that rate is 11 percent. The amount of balances that are 30 or more days delinquent has also grown dramatically. There were nearly $33.2 billion in new delinquent student loan balances last quarter, up from around $21.8 billion one year prior and $16.2 billion in the third quarter of 2009.
"We hear from borrowers regularly who aren't aware of what their options are," says Rohit Chopra, student loan ombudsman at the Consumer Financial Protection Bureau.
Exactly why people may not be using the system when they qualify is a matter of some debate among proponents. One culprit may simply be a byzantine system.
"The student loan repayment system is overly complicated," says Heather Jarvis, a student loan expert who provides trainings on loan repayment. "Students don't really have access to personalized advice about the best way to approach their student loan debt."
Daren Briscoe, acting press secretary for the Department of Education, acknowledges that keeping students abreast of their options is hard.
"It is a difficult challenge to ensure that borrowers have the right information at the right time to assist them with making better college financing and loan repayment decisions, and we are continuously working to improve our communication with students and borrowers to accomplish that goal," he says in an E-mail.
Until recently, the process of getting approved for reduced loan payments was decidedly 20th-century, with some borrowers having to fax or mail their most recent tax returns, then wait for weeks or even months in order to be approved. Now, the government offers an online application that automatically allows borrowers to link to their IRS information. Briscoe says that he believes that streamlining the process has boosted participation and believes that it will continue to grow.
Why does it matter? For borrowers like Terrell, it can mean more disposable income for making everyday purchases.
"I would have been able to squeeze my payments in, but I wouldn't have the buying power I have right now," she says.
That means that programs such as IBR could provide a modest boost to the economy.
"There people that are able to service the debt but they might be paying more than they necessarily need to toward that. [If] they could have it reduced, then it would up their spending," says David Nice, associate economist at Mesirow Financial, a Chicago-based financial services firm. He says that would mean an economic boost "at the margin" — perhaps nothing that would fundamentally change the economy, but could mean more house payments and retail spending.
Helping students with towering debt levels also could help young borrowers struggling to get into the job market, Chopra points out, as many employers perform credit checks on potential hires.
Then again, lower payments are only going to help people who can afford the lower payments, Nice cautions.
"If you can't pay $5, and you have no money, you still can't pay $2," he says.
Aside from that, it also means a longer repayment period. The IBR program extends out for up to 25 years the payments on a loan that normally would only have gone on for 10 years under standard repayment. That can mean more money paid over time, though the program does forgive balances remaining after 25 years.
It also doesn't mean that payments will be at bargain-basement levels, Terrell says.
"It's more than my mortgage payment. It's the most expensive bill I have," she says. And as she is expecting her first child soon, Terrell says she will request yet smaller payments to compensate for her smaller pay during maternity leave.
There are also plenty of people that the system does not help — those with private loans, for example.
Jarvis believes that the problem of high student loan payments can't simply be fixed by giving people slightly easier repayment terms.
"Our system of access to education is a debt-based system right now, and that's really where the problem should be addressed," Jarvis says. Student loans, she says, were originally intended to level the playing field and allow students of modest means to get to college. Yet she notes: "We still see huge [educational] gaps between people who come from backgrounds of privilege and people who do not. ... This is a problem of our own creation."
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Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter @titonka or via E-mail at email@example.com.