Today’s blog will highlight a national story that hits close to home –changes to the federal student loan program.
I know we ran the AP story about this issue in today’s paper and another Advocate reporter blogged about the announcement yesterday, but I wanted to touch upon it as well, seeing as how I am in the number of graduates struggling to repay student loans.
As a college graduate with more student loans than I care to think about, all stemming from my out-of-state undergraduate education, the fact that these changes only apply to federal loans taken out after 2008 does not provide much of a financial relief to those of us with both federal AND private student loans.
These new changes only seem to benefit students who are in school now not those of us who graduated prior to 2011 and are struggling to make payments either because of extremely high debt loads, low salaries, or most likely because of both situations.
Today, at least 450,000 people participate in the federal income-based repayment program that started about two years ago.
The new plan, which is set to be put in place by President Barack Obama by executive order, will let former students cap loan payments at 10 percent of their discretionary income starting in 2012. It would also forgive the balance after 20 years of payments.
This story by The New York Times helps clarify exactly what these changes to the federal loan repayment program are and who exactly will benefit from these changes.
Q. Who is eligible?
A. People with at least one federal loan that they borrowed directly from the federal government and at least one that originated with a bank or other lender. If you have a bunch of bank-issued federal loans but no loan directly from the government, you can consolidate them under an older federal program, but it won’t save you as much money. The PLUS loans that some graduate students have taken out in recent years are eligible. Perkins Loans and many federal loans for people entering health professions are not eligible. And again, private student loans are not part of the mix here either. Also, if you’re in default on the loans, you won’t be eligible.
Q. How do I know what kind of loan I have?
A. Don’t be embarrassed to ask, since many people have forgotten or never knew in the first place. Call your lenders now and ask them. The Education Department plans to inform all eligible borrowers in January as well. If you haven’t heard from them by the end of that month, call them at 1-800-4FEDAID (1-800-433-3243) and ask.
Q. Is there a limit to the number of federal loans I can consolidate?
Q. What will I save if I consolidate under the new program?
A. It depends, and the formula for calculating your new interest rate is complex. First, you’ll subtract 25 basis points (a quarter of a percentage point) from the interest rate of your federal loan that a bank or other lender originated. You can also subtract another 25 basis points for both those bank loans and any loans that came from the federal government directly if you agree, once the loans are consolidated, to let the federal government (which will be the new lender of record) pull the payment automatically from your bank account each month. The new rate will then be a weighted average of the two (newly discounted) rates from the two different types of loans, based on the balances of each loan.
Q. When can I sign up, and for how long?
A. Enrollment should begin in January and is scheduled to end on June 30, 2012.
Q. Can this help me make more of my federal loans eligible for forgiveness if I work in certain public service jobs?
A. Yes. The only federal loans that are eligible for that forgiveness plan are ones in the federal direct program, which is where you end up when you consolidate your federal student loans in this fashion. By consolidating, older federal loans that banks originated for you would then become eligible.
Q. What if I recently consolidated? Can I unconsolidate to take advantage of this new discount?
Q. Who is eligible for these income-based repayment plans in the first place?
A. Eligibility is based on something known as “discretionary” income, which the federal government defines as anything above 150 percent of the poverty level. The poverty level depends on your state and the size of your family. The big idea here is to only allow people to qualify whose income makes it hard to afford their full federal student loan payments. (Private loans do not factor into income-based repayment.) All of this is outlined in plain English on IBRinfo.org, a Web site maintained by a nonprofit group called the Project on Student Debt. Your lender or the company servicing your loan will decide whether you’re eligible.
Q. What is changing with these programs as a result of Wednesday’s announcement?
A. Currently, people who qualify pay no more than 15 percent of their discretionary income toward federal student loan payments each month. You only have to make payments for 25 years, even if there’s still a balance left. The new plan will lower the cap to 10 percent of discretionary income and waive any balances after 20 years of repayment. (Again, better deals are available for people who are working in certain public service jobs.)
Q. Any other catches?
A. Yes. This new income-based plan is not available to people who graduated in 2011 or earlier and have no plans to take out any new federal loans. Instead, you must have at least one federal loan from no earlier than 2008 and also take out one more in 2012 or later to qualify.
I’m not going to get in the politics of the situation, but in my opinion as a borrower, this plan is not a Godsend for all borrowers.
Leaders, more financial relief is needed.
What are your thoughts on these new changes or your thoughts on student loans period?
Consider this a safe haven to discuss the evil that is student loans.
**DISCLAIMER: THE THOUGHTS REPRESENTED IN THIS BLOG ARE MINE AND DO NOT REPRESENT THE THOUGHTS OF THE ADVOCATE ****
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