Loans

Obama Administration Provides Additional Student Loan Plan Details

Per NASFAA (National Association of Student Financial Aid Administrators)

Obama administration officials provided additional details about their plans to provide relief for some student loan borrowers, but say that the U.S. Department of Education will use negotiated rulemaking to develop implementation details for the plan to offer more generous Income Based Repayment (IBR) terms in 2012.

The administration indicated that the .5 percent interest rate reduction incentive for borrowers who consolidate their Federal Family Education Loans (FFEL) and Direct Loans will only be offered to a limited pool of borrowers. The incentive will only be available to borrowers who received a federal loan since 2008 and also receive a federal loan in fiscal year (FY) 2012. Eligible borrowers will be notified by the Department and must consolidate between Jan. 1, 2012 and June 30, 2012 because the recent Budget Control Act eliminates the Department’s authority to provide borrower incentives After June 30, 2012. The administration encourages borrowers with FFEL and Direct Loans to wait until Jan. 1, 2012 to consolidate so can benefit from the incentive.

Regarding the more generous IBR terms,  the administration says that the plan would not override the current IBR program, but would operate separately.  The plan will be a topic at the upcoming loan-related negotiated rulemaking and will likely fall under the “early implementation” provision—meaning that the Department can enact it early. Many specific details are not yet available and will likely not be addressed until negotiated rulemaking and implementation.

However, the administration may release additional details in response to a request by House Education and the Workforce Committee Chairman John Kline (R-MN). Kline sent a letter to Education Secretary Arne Duncan requesting an explanation of how the proposal would impact taxpayers,  the timeline for implementation and how the Department will explain these programs to borrowers.

Background

The Obama administration announced on Oct. 25 two initiatives aimed at lowering monthly student loan payments for borrowers struggling to repay their loans. The announcement was part of a series of executive actions the White House seeks to implement without Congressional approval. 

Under the administration’s plan:

Students with both Federal Family Education Loans (FFEL) and Direct Loans will be offered an incentive to participate in a special consolidation into the Direct Loan program

More generous income-based repayment (IBR) terms will be fast-tracked to become effective in 2012 instead of 2014

Currently, nearly 6 million students have loans from both FFEL and DL servicers.  The administration plans to offer repayment incentives for students with split servicers if they move all of their loans over to DL.  Students would be able to receive up to a 0.5 percent reduction to the interest rate on some of their loans— .25 percent reduction on consolidated FFEL loans and an another .25 percent reduction on the entire consolidated FFEL and DL balance.  The administration has referred to this initiative as a “special” consolidation where students will be able to keep the terms and conditions of their initial loans.

In 2010, Congress passed changes to the IBR program to limit monthly payments to 10 percent of discretionary income (down from the current 15 percent) and forgiving remaining debt after 20 years (down from the current 25 years). The Obama administration hopes to implement these changes, deemed the Pay As You Earn (PAYE) plan, two years ahead of schedule, beginning in 2012. 

The IBR program bases monthly payments on any income above 150% of the poverty line. So a borrower living alone would pay 10% of anything earned above $16,335 (according to the 2011 poverty level). Unemployed borrowers with no income could owe no monthly payments and still be considered eligible for loan forgiveness after 20 years. However, interest continues to accrue on these loans and borrowers who don’t qualify for loan forgiveness could end up paying more.

The administration wants to implement these initiatives quickly, but House Republicans have expressed opposition to these initiatives and claim that the administration doesn’t have the authority implement these programs.

Obama Looks to Bypass Congress to Provide Student Loan Relief

Per NASFAA (National Association of Student Financial Aid Administrators)

Obama administration officials yesterday announced two initiatives aimed at lowering monthly student loan payments for borrowers struggling to repay their loans. The announcement is part of a series of executive actions the White House seeks to implement without Congressional approval.

Under the administration’s plan:

Students with both Federal Family Education Loans (FFEL) and Direct Loans will be offered an incentive to consolidate loans into the Direct Loan program
More generous income-based repayment (IBR) terms will be fast-tracked to become effective in 2012 instead of 2014
The U.S. Department of Education will partner with the Consumer Financial Protection Bureau (CFPB) to create a model financial aid disclosure form
Currently, nearly 6 million students have loans from both FFEL and DL servicers.  The administration plans to offer repayment incentives for students with split servicers if they move all of their loans over to DL.  Specifically, students would be able to receive up to a 0.5 percent reduction to the interest rate on some of their loans. Students would be able to do this beginning January 1, 2012 and through June 30, 2012.  The Administration has referred to this initiative as a “special” consolidation where students will be able to keep the terms and conditions of their initial loans.

In 2010, Congress passed changes to the IBR program to limit monthly payments to 10% of discretionary income (down from the current 15%) and forgiving remaining debt after 20 years (down from the current 25 years). The Obama administration hopes to implement these changes, deemed the “Pay As You Earn” plan, two years ahead of schedule, beginning in 2012.  The Pay As You Earn plan would not override the current IBR program, but would instead operate separately, though very similarly.

The Institute for College Access and Success (TICAS) estimates that roughly half a million borrowers are currently taking advantage of the IBR program, but that hundreds of thousands more are eligible and not taking advantage of the program.

The IBR program bases monthly payments on any income above 150% of the poverty line. So a borrower living alone would pay 10% of anything earned above $16,335 (according to the 2011 poverty level). Unemployed borrowers with no income could owe no monthly payments and still be considered eligible for loan forgiveness after 20 years.

Private Student Loans vs. Federal Student Loans

“There are two types of student loans: federal loans, which are issued directly by the federal government, and private loans, which are provided by banks and other lenders. Most borrowers who take out federal student loans will pay a fixed rate of 6.8%,” USA Today reports. “Students who qualify for subsidized loans, which are awarded based on financial need, will pay a fixed rate of 3.4% on loans issued after July 1. Interest rates on private loans vary, depending on the lender and the borrower’s credit rating. In recent months, though, rates on these loans have dropped. In April, for example, lending giant Sallie Mae reduced rates on its private loans to as low as 2.25%. ...But while some private loan rates look appealing, you should never sign up for one until you’ve maxed out on federal student loans. And even then, you should scrutinize the terms of the loan contract before you borrow.”

Top 5 Tips to Take Charge of Your Student Loans

“This year’s college graduates will get a lot of advice over the next few weeks from a parade of commencement speakers. Find your passion. Believe in yourself. Take risks. But here’s something graduates probably won’t hear from the dignitary at the podium: Pay your student loans,” ABC News reports. “That’s too bad, because the consequences of defaulting on student loans are nothing short of catastrophic. Your credit score will plummet, making it more difficult to buy a house or find a job. Your wages may be garnished, and the government may withhold tax refunds or Social Security benefits. Student loans are nearly impossible to discharge in bankruptcy, so they could follow you to your grave, says Lauren Asher, president of the Institute for College Access & Success. The most effective way to avoid this nightmare is to take charge of your student loans right away. Most student lenders give graduates a six-month grace period. But don’t wait until you’re required to start making payments to get organized, Asher says.”

7 Ways Private Student Loans Are Getting Better (U.S. News & World Report)

“The credit crunch that caused bankers around the country to stamp ‘REJECTED’ on millions of college loan applications appears to be easing. Banks, credit unions, nonprofits, and new alternative lenders are approving more and cheaper tuition loans with variable interest rates starting as low as 1.8 percent for parents and even a few creditworthy students,” U.S. News & World Report reports. “Although they are offering some bargains, lenders advise all students to apply first for federal aid, including low-cost government loans, by filling out the Free Application for Federal Student Aid. ... While private educational loans are also hard to escape, recent law reforms and improvements in the economy have sparked seven big improvements over the high-priced, tough-to-get private loans of 2009.”

You can read the complete June 22, 2010 U.S. News & World Report article on-line.

6 Advantages to Federal Student Loans (U.S. News & World Report)

“Despite the credit crunch, some banks are marketing private educational loans with seemingly low interest rates. And some students think they can save money and hassle by putting their college charges on their credit card,” U.S. News & World Report reports. “But those funding choices can end up costing thousands in extra interest and fees, says Dan Thibeault, a co-founder of Graduate Leverage, which advises students on funding options. A few hours invested in filling out a Free Application for Federal Student Aid and arranging for federal student loans can save big money and heartache.”

You can read the complete April 20, 2010 U.S. News & World Report article on-line.