There are two words that gnaw at the back of the brain of many a burgeoning entrepreneur: “student” and “loan.” According to a report by the Institute for College Access and Success, 69 percent of students who graduated in 2013 left school with at least some debt.
Many recent graduates with debt may think that they have to put aside their dreams of launching a business and seek steady work instead. But something called the Income-Based Repayment Plan (IBRP) can help recent grads stay on top of their payments while still moving ahead with their business goals.
The IBRP was created specifically to encourage young graduates to open their own businesses and get involved in start-ups. It uses a sliding scale to determine the most affordable way for recent grads to pay off federal loans, which in turn, leaves them with more cash to invest in entrepreneurial endeavors.
So how does it work?
Rather than having a set payment amount that’s due every month of every year until the whole debt is paid off, the monthly payment amount is determined by income at the time that you apply. But the great thing is, in this case, “income” doesn’t mean the number printed on your paycheck. Instead, it refers to discretionary income (your income minus living expenses—like rent, food and health insurance). So a New York City-based applicant will likely report a lower income than a Des Moines-based applicant—even if they make the same salary—since living expenses cost more in the big apple.
Let’s look at what steps are involved.
Make your way over to the online Repayment Estimator. Not only will this give you an idea of what your monthly payment amount would be under the IBRP, but it will allow you to compare it to other payment plans in order to ensure it’s the best repayment plan for you.
Okay, so now you’ve got an idea what your monthly payment would be. Next, it’s time to see whether you are eligible for the IBRP. Most recent grads are eligible, since they only need to meet two requirements.
The first requirement is a bit of a no brainer: the calculated monthly IBRP payment must be lower than what it would be under the Standard Repayment Plan. (After all, if you weren’t going to be paying a smaller amount each month, then you wouldn’t be interested in this plan, right?)
The second requirement is that your federal student loan debt be higher than or a “significant portion of” your annual income. So as long as you owe as much or more than you make in a year, you’re all good.
To switch from a standard repayment system to an IBRP plan, contact your lender, who will give you the appropriate application forms. The process is relatively straightforward, but you will need to fill out a separate application for each lender. Typically, lenders approve applications in about two weeks.
That’s it! After you receive your approval, you start paying your new amount.
The Small Business Administration has set up a pretty thorough site to give you the skinny on all the details. And there are certain details you need to explore: for example, the IBRP will extend the life of your loan, which means more interest will accrue over time. You’ll also need to provide proof of your stated income.
In 2015, the government is slated to launch new income-based repayment plans, so bookmark the SBA’s change and look for those announcements.
No, the IBRP isn’t going to make college any cheaper and it’s not going to make that debt disappear. But it can boost your cash flow and pave the way for you to start your start-up, now. Ladies, start your engines.
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