New Steps by Obama Administration to Help Student Borrowers
On October 25, 2011, President Obama announced two initiatives to assist borrowers in lowering their monthly student loan payments.
The first proposal is a Special Loan Consolidation Program and would be applicable for the Class of 2011. This program, which will be offered from January 2012 to June 2012, will provide an incentive for borrowers to consolidate their Federal Family Education Loans (FFEL) and their Direct Loans. Borrowers must have: at least one Federal Family Education Loan (FFEL) or Direct Loan held by the Department of Education and One commercially-held FFEL Loan.
Currently, the interest rate on a Federal Consolidation Loan is the weighted average interest rate rounded up to the nearest 1/8th of a percentage point. Those eligible for a Special Consolidation Loan will receive an interest rate reduction of 0.25% as a repayment incentive, in addition to the existing 0.25% reduction if enrolled in the Department of Education’s automatic electronic debit system. Once Special Direct Consolidation Loans are available in January 2012, a Department of Education servicer will notify eligible borrowers.
Federal Student Loan Consolidation is intended to help borrowers manage their debt by ensuring all of their federal loans are serviced by the same entity, resulting in one bill and one payment (borrowers repay loans to a loan servicer). Private student loans are not eligible.
The second proposal involves changes to the Income Based Repayment (IBR) plan. Currently, Income Based Repayment is one of several repayment options for any borrower with a Federal Family Education Loan (FFEL), or a Direct Loan, that caps the monthly payment amount based on 15% of your discretionary income. Any remaining loan balance after 25 years will be forgiven (unless eligible for the Federal Public Service Loan Forgiveness program which forgives any outstanding balance on a Direct Loan after 120 payments.)
In 2010, Congress passed an improved IBR plan that caps monthly payments at 10% of discretionary income, and provides loan forgiveness on any outstanding balance after 20 years (vs. 25 years) of making IBR payments. This improved plan is effective for new borrowers after 2014. The Obama Administration’s recent "Pay as You Earn" initiative would move this date up to 2012,however, this plan won’t be finalized until the proposal goes through the negotiated rulemaking process, and therefore will not be available to students who graduated in 2011 or earlier.
Click here to read the full text of President Obama’s announcement.
Click here to read the Fact Sheet, “Help Americans Manage Student Loan Debt."
Seton Hall Law will keep you updated as we receive new details. As always, if you would like to discuss your situation, please contact our the Financial Resource Management office at 973-642-8850 or contact Karen Sokol, Director of Financial Resource Management, at firstname.lastname@example.org or call 973-642-8738.