President Obama announced a plan this week to help alleviate student loan burdens. The President’s plan shows that the Administration is hearing the voices of struggling student loan borrowers. It is a good step in providing some relief, but much more needs to be done.
There are a lot of details to work out, but there are two main components to the plan. First, the Administration announced a new loan consolidation program, which will be called “Special Direct Consolidation Loans.” These “special” loans are not the same as traditional consolidation loans. The new loans are special because those who consolidate through this new program will get interest reductions that are not available in the traditional consolidation program.
Not all borrowers are eligible for the “special” consolidation program. Only borrowers with at least one Direct Loan or FFEL loan held by the Department of Education AND at least one commercially-held FFEL loan (“commercially held” means that a private servicer or lender holds the loan). This is a temporary opportunity, available only from January through June 2012.
The other part of the plan, “Pay As You Earn”, will not go into effect right away. The details will have to be worked out through the upcoming negotiated rulemaking sessions.
The proposal is to offer a more favorable income-based repayment formula and forgiveness period to certain borrowers. Currently, the income-based repayment plan (IBR) uses a formula that requires payments of 15% of income. Remaining balances are forgiven after 25 years of repayment. (The Department of Education’s IBR calculator can help you figure out whether you qualify for IBR and if so, what your payments will be).
Congress passed legislation earlier this year that changed the IBR formula to 10% and 20 years, but only for new borrowers taking out loans in 2014 or after. The “Pay As You Earn” proposal will extend this benefit to some new borrowers taking out loans in 2012 or after. The benefit will not apply to borrowers with older loans. These borrowers can, however, apply for IBR under the 15%, 25 year formula. In addition, the Obama Administration’s new plan does not address private student loan debt.
