Contrary to the Official Guide‘s dire warnings, law school debt repayment is no longer a simple “pay-or-else” proposition. The likelihood that a recent law school debtor will default on his or her loans is now very low thanks to the Department of Education’s new repayment option for paying off federal guaranteed and direct student loans: Income-Based Repayment (IBR) and its 10-year public service complement, Income-Contingent Repayment (ICR). IBR is somewhat complicated, and revisions to the rules will go into effect in 2014 if not sooner. Here is a brief explanation of how the new repayment plan works:

•  All federally guaranteed or direct loans qualify for IBR except PLUS Loans made to parents, consolidation loans including PLUS Loans made to parents, and federal loans consolidated with private loans. Most law students who use up to $20,500 in direct unsubsidized loans (at 6.8 percent interest) and unlimited Grad PLUS loans (at 7.9 percent interest) are eligible for IBR, but the government averages the interest rate it charges on those loans to 7.35 percent. Loans in default are ineligible.

•  Debtors can take advantage of IBR if they can demonstrate that they have a “partial financial hardship,” which means that their monthly payments under IBR would be less than what they would pay under a 10-year standard repayment plan.

•  IBR requires debtors to pay 15 percent of their “discretionary income” divided by 12 months. Discretionary income is the difference between the debtor’s “adjusted gross income” and 1.5 times the Department of Health and Human Services’ poverty guidelines for the debtor’s state and family size. The 2012 poverty guideline for the contiguous 48 states was $11,170 plus $3,960 for each additional family member, including spouses. The guidelines are indexed to inflation and additional information on them can be found here.

•  After 25 years under IBR, the government cancels the loan, but the debtor must pay income tax on the canceled amount. Debtors who make 120 monthly payments while working full-time in a public service position will have their loans canceled after 10 years but are not required to pay income tax.

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