How the changes affect borrowers

Millions of indebted current and former students should get relief from crushing loan payments thanks to the College Cost Reduction and Access Act.

The bill, which passed both houses of Congress on Friday and appears certain to become law, does not provide immediate relief. But it phases in interest rate and payment cuts over the next several years.

How will the lending changes work, when will they apply and whom do they affect? Here are a few answers.

How will student loan interest rates be affected?

The law phases in interest rate reductions on subsidized student loans, mainly Stafford loans, starting next year. Subsidized loans are provided to borrowers who qualify for need-based aid. They differ from unsubsidized student loans in just one respect under current law: The government pays the interest on subsidized loans while the student is in school; on unsubsidized loans, the interest accrues and will add to the loan balance if not paid by graduation time.

Under the new law, there will be a second difference between these two types of loans. Unsubsidized loans will accrue interest at today’s 6.8% fixed rate. The interest rate on subsidized loans will ratchet down, starting at 6.0% for loans taken out after June 2008, 5.6% in 2009, then 4.5% in 2010 and to 3.4% in 2011. In 2012, the rate will return to 6.8%.

These rates will be fixed for the life of the loan.

What about loan repayments?

The law creates an income-based repayment plan that ensures that both subsidized and unsubsidized borrowers would not have to dedicate more than 15% of their discretionary income to repay federal student loans. Because repayment is based on the borrower’s income, many with entry-level jobs would end up paying less than 15%, said Robert Shireman, executive director of the Berkeley-based Project on Student Debt.

How is discretionary income defined?

It’s your income, minus 150% of the federal poverty level for your family size. For example, the federal poverty level is $10,210 for one individual living in the continental U.S. So, discretionary income would be only the amount that exceeds 150% of that, or $15,315. The poverty level varies by family size and is slightly higher for those in Alaska and Hawaii.

So if a single person’s income out of college is $30,000, the annual repayment of student loans would be limited to $1,072 annually. If the individual’s income is $60,000, the repayment would be capped at about $5,000, according to the Project on Student Debt.

What if my income-based repayment plan doesn’t whittle down my debt fast enough to repay over the course of my lifetime? Will my heirs be stuck paying off my student loans?

After 25 years of consistent repayment, the remaining debt would be forgiven under the new law. The only downside to that: Under current law, any debt that’s canceled would be considered income and subject to federal income tax. So, a borrower who had $10,000 in loan principal wiped away at the end of 25 years would face a $2,500 federal income tax bill, assuming the borrower was in the 25% marginal tax bracket. But, there is talk of changing the law to eliminate the tax hit too. Stay tuned.

Does this apply to existing loans -- and people who have been out of school for years?

Yes. The income-based repayment program doesn’t launch until July 2009, but when it starts, it affects all outstanding loans -- no matter how long they’ve been outstanding.

Is there any other way to get loans forgiven or canceled?

Yes. The new law also creates a loan forgiveness program for law enforcement officers, firefighters, members of the military, public defenders, prosecutors, early-childhood educators and some others.

If these individuals are signed up with income-contingent repayment on direct student loans -- those are loans made through the federal government rather than private lenders -- they can qualify for debt forgiveness after working in their profession for 10 years and making consistent payments during that time period.

What if I’m not in the direct loan program?

Contact the Department of Education at 1-800-4-FED-AID to find out about consolidating your loans into its program. The 10-year clock starts running only when you’re in an income-contingent repayment plan, and that’s only offered through the direct loan program. So the sooner you consolidate, the better.

kathy.kristof@latimes.com