A Life Raft for Student Loans

Starting on July 1, 2014 the federal Income-Based Repayment (IBR) program would allow existing student loan borrowers to reduce their monthly student loan payments from 15% to 10% of their income.

President Obama recently developed a proposal called “Pay As You Earn” is a revision of the current IBR program that will help recent graduates can reduce student loan payments to 10% of their income starting in 2012 and would assistance more than 1.6 million people. The “Pay As You Earn” will also make it easier to participate in the program and work to educate student loan borrowers on the program.

The IBR is a repayment plan that caps your required monthly student loan payments on the major types of federal student loans at an amount based on income, family size, and state residence and if the IBR payment is lower than your current student loan payment. If you are married and file jointly, your spouse’s income is considered for eligibility in the IBR program.

All Stafford, PLUS, and Consolidation Loans available through the Direct Loan or Federal Family Education Loan (FFEL) programs are eligible. Loans currently in default and Parent PLUS Loans are not eligible. The program may increase the length of the loan repayment and accrue additional interest over the life of the loan. The program is most helpful for recent graduates or those who make a modest income.

Student loan borrowers with multiple student loans are being encouraged by the Department of Education to consolidate their FFEL loans into the Direct Loan program. The terms and conditions of the loans would remain the same, and starting in January 2012, would allow borrowers to make only one monthly payment.

Borrowers who take advantage of consolidation may be eligible to receive up to a 0.5% reduction on their interest rate: a 0.25% interest rate reduction on consolidated FFEL loans and 0.25% interest rate reduction on the entire consolidated FFEL and Direct Loan balance.

Contact your student loan servicer to find out how to sign up for the IBR program. Provide your feedback to the Consumer Financial Protection Bureau and the Department of Education on the new “Know Before You Owe” project to create a financial aid disclosure form to help current and prospective college students better understand the type and amount of aid they qualify for and compare financial aid packages offered by different colleges which would outline their total estimated student loan debt, monthly loan payments after graduation and additional costs not covered by federal student aid.

A Slam Dunk for Student Loan Borrowers

On March 29, 2010, President Obama signed a bill to assist student loan legislation that goes into effect in 2014. One goal of the bill was to produce the most college graduates by 2020 . The bill will:

1. End subsidies to private banks that will no longer be allowed to make student loans with federal money, but may continue to earn income by servicing those loans.

2. Double funding for Pell Grants limits up to $5,550 in 2010 and up $5,975 per student by 2017. The Pell Grant will rise with inflation starting in 2013.

3. Cap a graduate's annual student-loan repayments at 10 percent of his or her income.

4. Help an additional 5 million Americans earn degrees and certificates over the next decade, by revitalizing programs community colleges across the country.

5. Expand Perkins Loan program.

6. Keep student loan interest rate at 3.4%.

7. Increase funding to College Access Challenge Grant Program to increase financial literacy and help retain graduate students.

8. Starting July 1, 2010, federal student loans will be originated through the Direct Loan program instead of through the federally guaranteed student loan program.

9. 100 percent of student loans will be serviced by private lenders who will have to compete for contracts to service federal student loans. Direct Loans can only be serviced by U.S. employees.

Under current legislation the government spends billions of dollars each year subsidizing financial institutions that make guaranteed federal student loans. This new legislation will generate approximately $68 billion in savings over the next 11 years.

The money saved will be used to expand the existing Income Based Repayment program for federal student loans. Under this program, student loan borrowers can have their monthly payments capped at 10 percent of income they have left over after covering basic needs, and any remaining debt will be forgiven after 20 years which will make it easier to pay back student loan debt. The current limit is capped at 15 percent of income left over.

This is great for public service workers such as nurses, teachers, military, etc. who will have their remaining debt forgiven after 10 years. Loans taken out in after July 1, 2014 will have to devote 10 percent of their income to paying back their student loans.

The Pell Grants will now provide $40 billion to eligible students to receive financial aid to help defer college costs including historically black colleges and universities. The legislation also provides new funding for community colleges to develop online courses, build partnerships with local employers, and help students obtain skills to ensure they succeed in the workforce.

Sallie Mae and many other lenders fought hard against the legislation but lost.