New Student Loan Legislation
You may have seen news coverage recently on federal legislation that will change the terms of student loans. Find out what those changes mean, and how they may affect you, as well as provide you with information on various ways to pay down student loan debt, and what to do if you can’t make your student loan payments.
If you have any questions about this new plan or your student loans, please schedule an appointment with the Iowa State University Financial Counseling Clinic.
President Obama’s “Pay as You Earn” Plan
Initially, legislation was in the works to ease the burden of student loans payments starting in 2014. However, the Obama Administration feels that student loan debt relief is necessary now, so the “Pay as You Earn” Plan will go into effect in 2012. What does this mean, and will it affect you?
· First, starting in January 2012, borrowers with at least one federal student loan and at least one FFEL, or Federal Family Education, loan may be consolidated and their interest rates reduced by 0.5%. Consolidating the loans will also simplify the payment process, as the borrower only has to make one payment each month instead of two.
· Two additional components of the plan take effect July 1st, 2012, and include changes to the Income Based Repayment plan, including lowering the payment cap to 10% of the borrower’s discretionary income (meaning, after all necessary expenses are met, the payment is limited to 10% of the remaining income, as determined by the government), and to reduce the loan repayment term from 25 years to 20 years. Remaining balances on the loans, after 20 years, will be forgiven.
· Certain requirements must be met in order to qualify for the new IBR plan or for special loan consolidation. Not everyone will be affected by the student loan changes, but “this could impact as many as 1.6 million Americans” (MSN Money, 2011). The following information outlines the conditions that must be met in order to take advantage of this plan.
Reading the Fine Print of the “Pay as You Earn” Plan
While these changes may have a positive impact on many people’s budgets, it’s important to understand the finer details of this plan to determine whether or not you qualify. Don’t assume that these changes will affect you, and expect lower loan payments, considering there are over 6.5 million students in the U.S. who received federal student loans in 2009, for example, and over 36 million people total who have federal student loan debt (National Center for Education Statistics). Given this information, you may be surprised to find that you’re not one of the 1.6 million borrowers mentioned above. You could say “the devil is in the details,” as there are strict terms for eligibility, in addition to many more details of the plan that have yet to be finalized. Keep in mind that this is not the final, comprehensive plan, but instead is the preliminary information from a “Fact Sheet” issued by the Obama Administration with the following details:
First, the new plan will only affect new borrowers. Borrowers with loans from 2007 or earlier are not eligible, as well as borrowers that are already in repayment or in default. “New borrowers” consist of federal student loan borrowers that are new since 2008 with at least one loan that originated in 2012 or later. If at least one loan is not from 2012, borrowers are not eligible. This includes those who graduated in 2011 or earlier.
Second, for the Special Direct Consolidation Loan, you must consolidate during a certain time period. While traditional Direct Consolidation Loans have been available since 2003, and are still available, this special loan consolidation programs runs from January 2012 through June 30th, 2012. According to the U.S. Department of Education, federal loans that are eligible for the special consolidation program include “FFEL Subsidized and Unsubsidized Stafford Loans; FFEL PLUS Loans (both those taken out by graduate/professional students and those taken out by a parent to pay for the costs of an undergraduate student); and FFEL Consolidation Loans.” Loans that are NOT eligible include the Health Education Assistance Loans (HEAL), Health Professions Student Loans (HPSL), Nursing Student Loans (NSL), Loans for Disadvantaged Students (LDS); Perkins Loans; and private student loans. In addition, you are not eligible if you consolidate your loans into a traditional Direct Consolidation Loan before Special Consolidation Loans are available.
Third, starting July 1st, 2012, changes to the Income Based Repayment Plan go into effect, including the 10% income cap and 20-year repayment term for debt forgiveness. Between these two components of the new plan, it’s important to note a few crucial items. First, the special consolidation plan may not be the best option for you, depending on your income and job. For individuals working in a lower-income position that qualifies them for public service loan forgiveness after just 10 years, consolidating into a 20-year loan is not to their advantage. In addition, two important dates are key when considering changing your student loan repayment plan: the special direct consolidation loan is in effect from January through June 2012 only. The new Income Based Repayment terms don’t go into effect until July 1st, 2012.
Fourth, loans must be in the grace period, in repayment, in deferment, or in forbearance in order to be eligible. Borrowers that are in default on their student loan payments, or are involved in bankruptcy proceedings, are not eligible for the lower payments or loan consolidation. In addition, the “Pay as You Earn” Plan does not apply to private student loans.
The Department of Education provides this useful chart for comparing the differences between the current income-based loan repayment program and the new repayment program:
Traditional Direct Consolidation Loan
Special Direct Consolidation Loan
The repayment term for the loan starts over, giving students longer to repay their loan. A longer repayment term may result in lower monthly payments but will ultimately increase the amount the borrower will pay over the life of the loan since more interest will accrue during a longer repayment period.
Each loan that is consolidated retains its original repayment term. As a result, borrowers will pay less interest over the life of the loan than they would under the traditional consolidation program.
A fixed rate based on the weighted average of the interest rates of those loans being consolidated rounded up to the nearest one-eighth of 1%, not to exceed 8.25%.
A fixed rate (not to exceed 8.25%) after applying the 0.25% interest rate reduction to the FFEL loans being consolidated.
Electronic Debit Benefit
Eligible for a 0.25% interest rate reduction if the loan is repaid through the Department’s automatic debit system.
Eligible for an additional 0.25% interest rate reduction if the loan is repaid through the Department’s automatic debit system.
More information on the new loan program is available on the Department of Education’s web page on Special Direct Consolidation Loans or by calling (800)-4-FED-AID. If you aren’t sure what type of student loans you have, your loan information can be found through the National Student Loan Data System. If you have any questions about student loans or the special loan consolidation plan, now would be a great time to schedule an appointment with one of the financial counselors at the ISU Financial Counseling Clinic. Appointments are free for undergraduate and graduate students.
ADDITIONAL STUDENT LOAN REPAYMENT OPTIONS
What if you don’t qualify for the new student loan repayment program? There are many other routes for relieving the stress of paying down student loan debt, including changing repayment terms through a traditional direct loan consolidation, or by applying for a temporary hold on payments through deferment or forbearance. The following information outlines current federal student loan repayment plans and concludes with tips for managing payments in troubled times.
Federal Loan Repayment Options
Depending on which plan you select for federal loans, the repayment period ranges from 10 years to 25 years. (Private loans are usually 10 years or less.) The most common federal loan payment plans include the Standard Repayment, Extended Repayment, Graduated Repayment, Income-based Repayment (IBR), and the Income-contingent Repayment (ICR) plans.
- Standard Repayment: Monthly payments are at least $50, and you pay a fixed amount each month until the loan is paid off. You’ll have up to 10 years to repay the loan, and as a result of this shorter loan term, payments will be higher than other repayment plans, but less interest will be paid over the life of the loan.
- Extended Repayment: With the extended repayment plan, you have 25 years to pay off the loan through a fixed annual or graduated repayment amount. Specific terms apply to certain loans: if you're a Federal Family Education Loan (FFEL) borrower, you must have more than $30,000 in outstanding FFEL loans. FFEL includes Stafford Loans, Unsubsidized Stafford Loans, Federal PLUS Loans, and Federal Consolidation Loans. In addition to FFEL, Direct Loan borrowers must also have more than $30,000 in outstanding Direct Loans. The monthly payment is fixed at a lower rate than under the Standard Repayment Plan, but you will pay more in interest since it accumulates over a longer repayment period.
- Graduated Repayment: Repayment can be made over a period of 10 years, with payments starting out low and then increasing every two years. The theory behind the extended repayment plan is that the loan payments increase as your income increases over the years. Keep in mind that with this plan, the payment will never be less than the amount of interest that accrues between payments, and although payments increase over time, it will never increase more than three times the amount of your other payments.
- Graduated Extended Repayment: GER may be beneficial if you expect your income to consistently increase over the repayment period. With this plan, repayment is made over a period of up to 25 years, depending on the amount owed. The monthly payment is the greater of $50 or the amount of interest that accrues monthly. Payments start out low and gradually increase every two years, and although the monthly payments are lower at first, you may pay more in total interest compared to other repayment plans.
To calculate your estimated standard, extended, or graduated loan repayment plan, go to the Federal Student Aid calculator. Enter your loan type, interest rate, and loan balance, then “calculate.”
Additional repayment plans include the Income Based and Income Contingent Plans:
- Income Based Repayment (IBR) is effective as of July 1, 2009. Income Based repayment is for the major federal loans and can help make loan payments more affordable than the extended or graduated repayment plans. According to the Federal Student Aid web site, monthly payments with IBR are limited to an amount that is “intended to be affordable based on income and family size.” Certain eligibility requirements must be met to use IBR: the monthly repayment amount under IBR should be less than the monthly amount calculated under a 10-year standard repayment plan. In addition, if you pay under the IBR plan for 25 years and meet certain other requirements, the unpaid portion of your loan(s) may be forgiven. If you’re employed in certain areas of public service, after 10 years the unpaid balance may be forgiven. Specific information about IBR is available through the Student Aid on the Web’s IBR Plan Information. You can also use the IBR calculator to find out if you qualify for the IBR plan.
Income Contingent Repayment (ICR) (for Federal Direct Loans Only): The ICR plan is a little more flexible by allowing you to meet your Direct Loan obligations “without causing undue financial hardship” (U.S. Department of Education). However, it is not available for Parent Plus loans. Monthly payments are calculated annually, and are based on adjusted gross income (your AGI, plus your spouse's income if you're married), family size, and the total amount of Direct Loans owed. Each month, you will pay the lesser amount of two calculations:
- The amount you would pay if you repaid your loan in 12 years, multiplied by an income percentage factor that varies with your annual income, or
- 20% of your monthly discretionary income. Discretionary income is the portion of your income left over once taxes and necessary expenses are paid.
Under this plan, if payments are not large enough to cover the interest that has accumulated on the loans, the unpaid interest will be capitalized once each year (added to the principal balance, and the interest is then computed on the new balance). Interest capitalization is limited to 10% of the principal balance (the original amount owed when you entered repayment). Once that 10% limit is reached, interest will continue to accumulate but will no longer be capitalized.
Additional terms state that the maximum repayment period for the traditional ICR plan is 25 years. If, after that time, your loans aren’t fully repaid, (deferment or forbearance does not count toward this time period) the unpaid portion will be discharged. Taxes may have to be paid on the discharged amount. Student Aid on the Web also states that “as of July 1, 2009, graduate and professional student Direct PLUS Loan borrowers are eligible to use the ICR plan.” To calculate your estimated ICR loan payments, visit the ICR plan calculator.
If you have more than one federal loan, you may want to consider consolidating them through the tradition Direct Loan Consolidation program. Loans can be consolidated generally any time after you leave school, graduate, or drop below half-time status as a student. A Direct Consolidation Loan allows you to combine multiple federal student loans into one loan, resulting in a single monthly payment. Just as with other repayment plans, it is important to carefully consider which plan is right for you when consolidating your loans. It is also important to remember that loan consolidation can simplify loan repayment and possibly lower your monthly payments, but it can also increase the total cost of your loans because of the longer payment period (up to 30 years). Repayment under the consolidation plan depends on the balance of your loans, as shown below:
- If you owe $7500 - $9,999 = 12 year repayment plan
- If you owe $10,000 - $19,999 = 15 year repayment plan
- $20,000 - $39,999 = 20 year repayment plan
- $40,000 - $59,999 = 25 year repayment plan
- Over $60,000 = 30 year repayment plan
The U.S. Department of Education emphasizes that “if you don't need monthly payment relief, you should compare the cost of repaying your unconsolidated loans against the cost of repaying a consolidation loan.” Compare the borrower benefits of your current loan versus the benefits offered under a new repayment or consolidation plan, including interest rates, rebates, and loan cancellation benefits. Once your loans are consolidated, they cannot be removed, so make sure you evaluate the terms and benefits of each plan to select the one that best meets your needs. Additional information may be found through the Checklist Tool for Consolidation or visit www.loanconsolidation.ed.gov.
Which Loans Can Be Consolidated?
Most federal student loans are eligible for consolidation under the traditional program, including:
· Subsidized and unsubsidized Direct and FFEL Stafford Loans
· Direct and FFEL PLUS Loans
· Supplemental Loans for Students (SLS)
· Federal Perkins Loans
· Federal Nursing Loans
· Health Education Assistance Loans
· Some existing consolidation loans
Please note that Parent PLUS loans cannot be consolidated with the student’s loans, but can be consolidated with the parent’s other federal loans. In addition, private education loans are not eligible for consolidation with federal student loans.
Traditional Direct Loan Consolidation Requirements
According to Student Aid on the Web, to qualify for the Direct Consolidation Loan (not the Special Direct Consolidation Loan):
- You must have at least one Direct Loan or Federal Family Education Loan (FFEL) that is in the grace period or in repayment.
- Satisfactory repayment arrangements have been made with your current loan servicer(s), or you agree to repay your new Direct Consolidation Loan under the Income Contingent Repayment Plan or the Income Based Repayment Plan.
- If you already have a Direct Consolidation Loan, you can only consolidate again if you include an additional FFEL or Direct Loan. In addition, if you have a FFEL Consolidation Loan, consolidation may be allowed under certain circumstances. Additional information is available at www.loanconsolidation.ed.gov.
If you qualify and decide to consolidate your loans, you will not be charged application fees or prepayment penalties. Interest rates are currently restricted to not exceed 8.25%. Repayment of a Direct Consolidation Loan begins immediately upon disbursement of the loan, which means your first payment will be due within 60 days. Repayment terms can range from 10 to 30 years, depending on your plan. Additional information on repayment of Direct Consolidation Loans is can be found on the Federal Student Aid Repayment Information site or through your loan servicer.
Options When You Have Difficulty Making Payments
If you are unable to make your monthly student loan payments and don’t make arrangements with your lender, your loans will go into default. Student loan defaults are reported to the credit bureaus, so defaulting will negatively impact your credit rating. Legal action can be taken to obtain payment, whether through wage garnishment and/or withholding of tax refunds. It is important to contact your loan servicer as soon as possible if you are having trouble making your payments, as they can work with you to find new payment options, including:
- Changing repayment plans, such as switching from Standard Repayment to Extended Repayment.
- Requesting a deferment, which allows you to temporarily stop making payments on your loan for a period of time.
- Requesting a forbearance, which allows you to temporarily suspend payments on your loan, reduce the payments, or extend the time for making payments if you don’t meet the eligibility requirements for deferment. Forbearance is only allowed in certain circumstances.
- If you have consolidated loans, you can, under certain circumstances, receive a deferment or forbearance. For more information on consolidated loan payment difficulties, visit the Student Aid on the Web page on Repayment Information.
It is important to utilize repayment plans, deferment, or forbearance if you are unable to make your payments, as going into default has more serious consequences than wage garnishment and tax refund withholding. When in default, you will be ineligible for additional federal student aid if you return to school, you will have to pay collection costs on top of the loan amount owed, or you can even be sued. Any time you have difficulty making your monthly loan payment, contact your loan servicer and communicate your situation with them. Working with the lender or servicer may be stressful, but it’s much less so than going into default.
Resources for Loan Information
1. Student Aid on the Web and the National Student Loan Data System provides federal loan information, including loan types, your loan servicer, disbursed amounts, outstanding principal and interest, and the total amount owed on all of your loans. NSLDS can be accessed at www.nslds.ed.gov. You will need your FAFSA pin to access this site.
2. Iowa State University Office of Student Financial Aid provides financial aid and student loan information, as well as links to the student loan resources listed in this month’s newsletter. The Office of Student Financial Aid can be found at http://www.financialaid.iastate.edu/loans/.
3. U.S. Department of Education is an additional source of financial loan payment and forgiveness information, deferment information, and many other valuable links for helping manage your student loan debt. For more information, visit the U.S. Department of Education’s web site.
For more information on student loans or another financial topic, or for individual financial counseling sessions or group workshop appointments, please contact the Iowa State University Financial Counseling Clinic.
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