Consumers struggling with federal student loans have a new option open to them in the form of an income-based repayment program - but it's not for everyone.

Under Income-Based Repayment, your required monthly payment is capped at an amount that's intended to be affordable based on your income and family size.

Federal student loans eligible under the plan:

• Stafford loans - the main federal loan for students.
• Grad PLUS loans.
• Most federal consolidation loans.

Loans not eligible:

• Parent PLUS [Parent Loan for Undergraduate Students] loans.
• Federal consolidation loans that include Parent PLUS loans.
• Private loans.

All eligible loans must be in good standing.

"We know many graduates are concerned about their ability to repay student loans in the current economic environment," said Secretary of Education Arne Duncan. "This new plan addresses the issue head-on by giving them the option of a monthly payment tied to their income."

The new repayment plan caps the monthly payments at a percentage of a borrower's discretionary income. The payment amount is adjusted yearly, based on changes in annual income and family size.

Specifically, the program caps payments at 15 percent of the amount by which your adjusted gross income exceeds 150 percent of the federal poverty line for your family size.

Here's an example from Mark Kantrowitz, a national expert on student financial aid and publisher of FinAid.org and FastWeb.com:

Say a single borrower has $40,000 in federal education loans and an adjusted gross income of $30,000 a year. The 2009 poverty line for a single person is $10,830, and 150 percent of that is $16,245.

The repayment cap on monthly payments would be 15 percent of $13,755 ($30,000 minus $16,245) divided by 12 months, or $171.94 a month.

"This is considerably lower than the $460.32 a month which would be required under standard 10-year repayment or the $277.63 a month which would be required under extended 25-year repayment," Kantrowitz said.

Income-based repayment is best for borrowers who have high debt relative to their income, but even borrowers with a lower debt-to-income ratio may benefit.

Even though the program is a good deal for financially strapped borrowers, you should understand other effects of the plan.

"It increases the repayment term up to 25 years, which increases the total interest paid over the life of the loan," Kantrowitz said.

However, after 25 years of making the lower payments, borrowers' remaining loan balances, including interest, will be completely forgiven.

For borrowers who enter public service fields, such as nursing, public interest law or nonprofit work, their debts will be forgiven after 10 years of service and loan payments.

"This is the first time in the Federal Family Education Loan Program that there is forgiveness for a borrower's unpaid balance after the 25 years of payments," said Patricia Scherschel, vice president at Sallie Mae, the nation's largest student loan lender. "The plan has the ability to offer a low payment - a payment as low as zero dollars for those folks who really have low income compared to what their monthly debt burden would be for those loans." To apply, contact your lender or your loan servicing company, which collects your loan payments.

Washington — The U.S. Senate last night gave final approval to a budget blueprint that sets the stage for an overhaul of student lending.

The plan, which Congressional appropriators will use as a guide when they draw up spending bills for the coming fiscal year, instructs the committees that oversee education to shave $1-billion from programs under their jurisdiction through a process known as budget reconciliation. Lawmakers are likely to seek those savings through major changes in the bank-based guaranteed-loan system, perhaps even eliminating it altogether, as President Obama has proposed.

The inclusion of reconciliation instructions in the spending plan, which follows similar action on Wednesday in the House of Representatives, is a win for the Obama administration because reconciliation bills, unlike normal bills, are filibuster-proof in the Senate. That means the president’s proposal could pass with only 51 votes, nine fewer than it takes to overcome a filibuster.

However, the plan also makes clear that many lawmakers remain wary of efforts to end guaranteed lending. In a nod to those lawmakers, Democrats included “sense of Congress” language specifying that any changes in the student-loan programs “should include some future role for the currently involved private and nonprofit entities.” The nonbinding language also alludes to job losses that could occur if bank-based lending were abolished.

The plan gives the education committees until October 15 to identify the $1-billion in required savings.

Lenders are urging Congress to hold hearings to consider other ways of remaking the student-loan system. “Now is the time for Congress and the administration to begin examining various options that fully leverage the capacity, experience, and dedication that nonfederal actors — including nonprofit and state-based agencies — bring to the table,” said Peter Warren, president of the Education Finance Council, which represents nonprofit lenders, in a statement.

Student groups, meanwhile, are celebrating passage of the spending plan. In recent weeks, they have sent more than 4,000 letters and made roughly 1,000 phone calls urging lawmakers to support the president’s proposal to end guaranteed lending and use the savings to make Pell Grants an entitlement.

“We are pleased to see Congress acting in the best interest of young people in America after playing such a huge role in the 2008 presidential election,” said Carmen Berkley, president of the United States Student Association, in a written statement.

Congress had been rushing to complete work on the spending plan by Wednesday, to deliver one last legislative victory to the president during his first 100 days in office. —Kelly Field