Personal Finance: Student debt help is limited

With student-loan debt totaling about $1 trillion and many wondering how they will make massive monthly payments in a lousy job market, some recent adjustments to loan rules by the Obama administration are giving people hope.

But the tweaks, which go into effect in 2012 subject to the Department of Education's rule-making process, are more limited than meets the eye. As details emerge, it's clear millions of Americans with old student debts are likely to be disappointed.

If you are borrowing money in 2012, you may be able to get some relief on student-loan payments, perhaps enough to allow you to pursue a low-paying career indefinitely. But if you graduated recently, no matter how overwhelming your debts might be, the latest loan-relief program probably won't help you. Here are some details:

Your possible benefit. If you have certain federal student loans and can't afford to pay them in the years ahead, the government will lower your monthly payments based on your income. Starting next year, some people won't have to make payments that exceed 10 percent of their disposable incomes. And if that means their loans aren't paid off completely in 20 years, the remaining money they owe will be forgiven.

This is an improvement from rules passed in 2007. Then, the government limited monthly payments to 15 percent of a borrower's disposable income and agreed to forgive loans if they weren't paid off entirely in 25 years.

Here's the catch: This relief doesn't apply to people who are done with college. It's for people who took out loans in 2008 or after and then also borrow in 2012, about 1.6 million of the 36 million with student loans.

Still, if this doesn't apply to you, you might be able to reduce your payments to 15 percent of disposable income. And if you reliably make payments for 25 years, you can escape what's left over.

If you've been done with college for years and you are having job problems, contact your lender and ask for forbearance. This will give you temporary relief, but whatever you owe will get tagged onto the future, even if it means paying for decades. Even in bankruptcy you can't escape.

How much debt is too much? Though you might think your loan payments are horrible, the government might not agree. Whether 10 percent or 15 percent of disposable income, the government uses a formula to decide what's affordable based on the federal poverty line. Your ability to pay is based on income (including a spouse's), the amount of your federal student loans, and family size.

The 15 percent formula would limit the payment for a single person with $25,000 in adjusted gross income to $108, and a person earning $55,000 would pay $483. But if the borrower had a family of three, the payment would be zero on a $25,000 income, and $340 on $55,000. The payments will be even more affordable under the 10 percent formula. Try the calculator at http://www.tinyurl.com/l3ktdx; find additional details at http://www.tinyurl.com/mjvuue.

Who can't participate? If you defaulted on your loan payments, you're out of luck. Also, relief is provided to borrowers with federal Stafford loans or PLUS loans taken out by students. Parents cannot get relief for the PLUS loans they took out to help children attend college.

Unfortunately, you cannot get relief on private loans, those that you usually get directly from banks rather than through financial-aid offices at colleges. Relief is applied to loans through the government's direct-loan program and through the Federal Family Education Loan program, which involves ties between the government and nongovernment lenders.

If you don't qualify for the income-based plan, you still can lower your interest rate through a process called "consolidation." You would convert your FFEL loans to the direct-loan program.

To understand which loans you have, try http://nslds.ed.gov or call the Federal Student Aid Information Center at 800-433-3243.