Student loan borrowers: Help is on the way
What a good week for borrowers: First, President Obama announced new rules to help homeowners with underwater mortgages. And now, new changes that can help roughly 5.8 million people who have federal student loans. Here’s how:
- IBR (Income-Based Repayment). This program lets folks repay loans according to how much they make, rather than how much they owe—which can help lower monthly payments. I’ve been raving about it since it launched in 2009, but under the new “Pay As You Earn” proposal, IBR gets even better. Borrowers can cap their monthly payments at 10 percent of their discretionary income (down from 15 percent). And after 20 years of participating in IBR, your loans will be forgiven (down from 25 years). Plus, it goes into effect in 2012 (rather than waiting until July 1, 2014).
- Loan consolidation. Many people have a combination of Direct Loans or FFEL (Family Federal Education Loans). Consolidating FFEL loans into the Direct Loan program can help folks receive up to a 0.5 percent interest rate reduction, qualify for loan forgiveness programs like IBR, and cut the clutter and confusion of managing multiple payments. This offer also takes effect in 2012.
But a big drawback—pointed out by Mark Kantrowitz, the financial aid guru behind FinAid.org, and Ron Lieber, “Your Money” columnist at The New York Times, is that both plans exclude many borrowers.
While the new IBR is a great boon for current and future college students, it’s not available to people who graduated in 2011 or earlier. To qualify, you must be a new borrower since 2008, and have at least one loan originating in 2012 or later (for example, someone who began college in 2009 and takes out loans each year until they graduate in 2013). So, the new IBR helps as many as 1.6 million people, but excludes the 36 million borrowers who are ineligible.
The new consolidation rules aren’t much better. The program is only available to those who have both FFEL and Direct Loans, and it excludes anyone in default or who has previously consolidated into the Direct Loan program.
On a positive note, the administration is at least trying to save future generations from drowning in debt. The same day Obama made this announcement, the Consumer Financial Protection Bureau unveiled a new initiative called “Know Before You Owe,” which proposes one-page financial aid shopping sheets that would make costs and loans clear to students before they enroll in college and allow them to compare offers side by side. (Yes, shopping around is a *must*—even for school!)
Plus, you can’t help but think this is a direct response to the Occupy Wall Street protest, which is full of picket signs to “Cancel All Student Debt,” or to the popular online petition “Forgive Student Loan Debt,” which now bears more than 600,000 signatures.
Will you be able to take advantage of the new student loan programs? Any questions I can help answer? Post them in the comments below, or ask me on Facebook or Twitter.
