President Obama Announces Relief for Student Loan Borrowers
As part of a series of efforts to boost the economy, President Obama announced a new plan last week aimed at relieving the debt burden faced by low-income graduates. His program is two-pronged: it will add consolidation options for borrowers with a combination of FFELP and Direct Federal Loans, and it will lower the required monthly payments for low-income borrowers who graduate in the coming years.
The new provisions for low-income borrowers will affect many thousands of Americans, while the debt-consolidation program could aid over 6 million who currently hold both FFELP and Direct loans.
New Consolidation Options
While the Obama administration eliminated the FFELP program last year in favor of providing all Federal loans directly from the government, many students and recent graduates have loans remaining from the old program in addition to their newer Direct loans.
The President’s new program will help these students combine their various Federal loans into one consolidated loan that features a lower interest rate. In addition to only sending checks to one place, borrowers will save a half-percent on their future interest payments. The interest rate will also remain fixed, ensuring that there are no surprises down the road to repayment.
Finally, borrowers who consolidate their loans will be eligible for the protections given to Direct loan borrowers, including the option to enroll in debt forgiveness programs in exchange for spending part of their careers in public service.
If you have loans from both the FFELP and Direct Federal Loan programs, you’ll be able to take advantage of this new program starting in January.
Income Based Repayment Changes
Low-income borrowers of Federal student loans have previously held the option to enroll in an income-based repayment program that capped their monthly payments at a percentage (usually 15%) of their earnings. Additionally, their debt may be forgiven after a certain number of years (typically 25) of payments.
In last week’s announcement, President Obama updated this program to limit monthly payments to 10% of a borrower’s discretionary income with the debt now being forgiven after 20 years. These changes had been previously planned for 2014, but will now go into effect next year.
The new IBR plan is available to new borrowers starting in 2012. Unfortunately, there are no provisions for those who currently have Federal loans to enroll in this program.
How to Take Advantage
You’ll be able to take advantage of these new provisions starting in 2012, so get ready! In the past, many eligible students have not used the income-based repayment program because they weren’t aware of it. Don’t let this happen to you – talk to your financial aid office or inquire with the Department of Education about your eligibility.
Also be sure to take a look at all of your Federal loans after the new year, and if you have both FFELP and Direct loans, seriously consider consolidating. For a little bit of upfront effort, you’ll save yourself time and money over the life of your loans.
To learn more, you can visit the Department of Education’s Student Aid website or call 1-800-4FEDAID.