Plan hopes to make student loans more forgiving
Thursday, October 27, 2011
Plan hopes to make student loans more forgiving
By: Sandra Block, USA TODAY
The Obama administration's proposal to provide relief to student
loan borrowers could reduce payments for some college graduates,
but the plan won't do anything for borrowers with the most
expensive types of student loans, analysts say.
The plan, which was unveiled Wednesday, contains two main
elements:
•Expands a program that allows federal student loan borrowers to
apply for a reduction in their loan payments based on their
income.
Currently, borrowers who qualify for the income-based repayment
program can have loan payments capped at 15% of their discretionary
income. After 25 years of qualifying payments, the balance of the
loan will be forgiven. Under the administration's proposal,
payments would be capped at 10% of discretionary income and
forgiven after 20 years.
However, this expanded relief would only apply to loans issued
in 2012 or later, says Michael Ryan, vice president of American
Student Assistance, a non-profit that helps borrowers manage their
debt. Borrowers with loans issued before 2012 would be subject to
the existing income-based repayment standards, he says.
Advocates for student borrowers hope the administration's plan
will raise awareness about the income-based repayment program,
which they say has been underused. An estimated 450,000 borrowers
have signed up since the program was launched in 2009, says Lauren
Asher, president of the Institute for College Access and
Success.
•Borrowers who have both Federal Family Education Loans, which
are federally guaranteed loans issued by private lenders, and
Direct Loans, which are issued directly by the federal government,
can lower their interest rate by a half-percentage point by
consolidating all of their loans into the Direct Loan program.
This option is only available to borrowers who have both types
of loans, Ryan says. Borrowers who have already consolidated their
loans won't be eligible. The consolidation option would be
available from January through June 2012.
The Obama plan doesn't provide any relief for borrowers who have
private student loans, which are issued by private lenders and
aren't backed by the federal government, Ryan says. Unlike federal
student loans, private loans have variable interest rates that may
shoot higher after the borrower graduates. They also lack many of
the protections that come with federal loans. Borrowers who are
having trouble repaying these loans have few options, other than
seeking relief from the lender.