A new student loan repayment program begins next week that could reduce or even forgive the amount you have to pay. CPA Kendall Wheeler from Moore Grider and Company joined us on KSEE Sunrise this morning to explain.

Graduating college students on average have more than $22,000 in debt. Starting July 1, 2009 – college grads will have a new option in paying off their student loans. A new repayment program kicks in that will cap monthly payments based on income. It targets borrowers who would have a hard time paying basic living expenses if they had to make standard monthly payments on their loans.

Under the income-based repayment program, such borrowers will never have to spend more than 15% of their discretionary income — an amount based on federal poverty guidelines — on student loan payments. Most who qualify for the program won't spend more than 10% of their income on student loans. Those whose income falls below 150% of the poverty level won't be required to make any payments.

If you work for a non-profit organization, a state or federal government agency or as a teacher, after 10 years of loan repayment the balance could be excused if you join the Income Based Repayment (IBR) program.

California CPAs suggest the following steps:

Step 1: Understand how the new program works.
Here's an example of how it would work: Suppose you have $30,000 in student loans, and you estimate that your 2009 income will be $25,000. Assuming your loans have a fixed interest rate of 6.8%, your monthly payment under the income-based repayment program would be $110, vs. $345 under a standard 10-year repayment plan.
If your income rises in the future, your payments will, too.

For some borrowers, the reduced payments won't cover the interest on their loans. For those with subsidized Stafford loans — which are provided to students who demonstrate economic hardship — the government will pay the interest for the first three years of the program. For unsubsidized loans, the interest will be added to the balance, so you could come out of the program with a larger loan balance.

However, any amount you owe after 25 years of qualifying payments will be forgiven. This is significant, because in the past, it was nearly impossible for borrowers to get out from under their student loan debts. Under current bankruptcy laws, borrowers must demonstrate "undue hardship" before a bankruptcy court will discharge a student loan, a costly and difficult standard to meet.

Step 2: Understand that not all qualify.
Unfortunately, not all borrowers are eligible to participate in the income-based repayment plan, even if they're experiencing economic hardship.
You're ineligible if:

•You have private student loans. The income-based repayment program is limited to federal Stafford, Grad Plus and federal consolidated loans.

That's important to remember if you're starting college this fall and plan to borrow. In 2007-08, 14% of undergraduate students took out private student loans, up from 5% in 2003-04, according to a recent analysis by the Project on Student Debt.

Many students use these loans to make up the difference between federal student loans and the cost of college. But private loans are typically more expensive than federal loans and have less flexible repayment plans. Limits on federal student loans were increased last year, so make sure you take full advantage of these loans before venturing into the private market.

•You've defaulted on your student loans. The income-based repayment program is available for all federal student loans, no matter when you took them out, but you must be in good standing to qualify. Most student loans are considered in default after you've failed to make payments for nine months.

To enroll in the income-based repayment program, you'll need to contact your lender. The Project on Student Debt has set up a website with information and updates about the program. Find it at www.ibrinfo.org

Check out the California Society of CPAs’ free, non-commercial, public service Web site on this and other personal finance/tax topics to help both consumers and small business owners. This Web site can be accessed at: calcpa.org Check out the “Dollar & Sense Program.