The Obama Administration is taking steps to increase college affordability by making it easier to manage student loan debt, part of a series of executive actions Obama is taking to put Americans back to work and strengthen the economy without Congressional action.
The Administration is moving forward with a new “Pay As You Earn” proposal that will reduce monthly payments for more than one and a half million current college students and borrowers. Starting in 2014, borrowers will be able to reduce their monthly student loan payments to 10 percent of their discretionary income. But President Obama realizes that many students need relief sooner than that. The new “Pay As You Earn” proposal will allow about 1.6 million students the ability to cap their loan payments at 10 percent starting next year, and the plan will forgive the balance of their debt after 20 years of payments. Additionally, starting this January an estimated 6 million students and recent college graduates will be able to consolidate their loans and reduce their interest rates.
More than 119,000 current New York residents would be able to lower their monthly payments through “Pay As You Earn” and more than 293,000 borrowers would be able to reduce their interest rates and simplify their payments by consolidating their loans, according to White House estimates.
“In a global economy, putting a college education within reach for every American has never been more important,” President Obamasaid. “But it’s also never been more expensive. That’s why today we’re taking steps to help nearly 1.6 million Americans lower their monthly student loan payments. Steps like these won’t take the place of the bold action we need from Congress to boost our economy and create jobs, but they will make a difference. And until Congress does act, I will continue to do everything in my power to act on behalf of the American people.”
“College graduates are entering one of the toughest job markets in recent memory, and we have a way to help them save money by consolidating their debt and capping their loan payments. And we can do it at no cost to the taxpayer,” said U.S. Secretary of Education Arne Duncan.
Last year, the President proposed, and Congress enacted, a plan to further ease student loan debt payment by lowering the IBR loan payment to 10 percent of income, and the forgiveness timeline to 20 years. This change is set to go into effect for all new borrowers after 2014—mostly impacting future college students.
Today, the Administration is proposing to offer even more immediate relief to many current college students by giving them the chance to limit loan payments to 10 percent of their discretionary income starting in 2012.
In addition, the debt would be forgiven after 20 years instead of 25, as current law allows. For many who struggle to manage their student loan debt – including teachers, nurses, public defenders and others in lower-paying jobs – these proposed changes could reduce their payments by hundreds of dollars each month. Overall, this proposal would provide an estimated 1.6 million borrowers with more manageable monthly payments.
Current law allows borrowers to limit their loan payments to 15 percent of their discretionary income and forgives all remaining debt after 25 years. However, few students know about this option. Students can find out if they are currently eligible for IBR at www.studentaid.ed.gov/ibr.
Beginning in January, student borrowers will also be able to better manage their debt and reduce their interest rate by 0.5% by consolidating their federal loans, which means lower monthly payments that would save hundreds of dollars in interest. Today, approximately 5.8 million borrowers have both a Direct Loan (DL) and a Federal Family Education Loan (FFEL) that require separate payments, which makes them more likely to default. To address the needs of these borrowers, the Administration will allow borrowers the convenience of a single payment to a single lender for both loans.
These changes carry no additional cost to taxpayers.
More Ways to Make College Affordable
The Administration is releasing the Council of Economic Advisors’ analysis “Making College More Affordable,” which highlights how President Obama’s work to increase federal grants and tax benefits has helped students better afford college even as tuition has continued to rise. Thanks to some increased Pell grants and other education benefits like the American Opportunity Tax Credit, the actual price of college is significantly lower for many students. This strong federal commitment to college education has enabled many students who would not have been able to afford higher education the opportunity to pursue their degrees. The CEA analysis can be read here: LINK.
The Administration said that it has $40 billion more to invest into college programs from the savings on eliminating subsidizes to private lenders.
The Administration also is working to help families be better educated consumers when they choose college, making it easier to figure the total cost. As part of the “Know Before You Owe” project, the Consumer Financial Protection Bureau, in collaboration with the Department of Education, will release today a Financial Aid Shopping Sheet — a draft model financial aid disclosure form. This sheet will be a tool that colleges and universities could use to help students better understand the type and amount of aid they qualify for and easily compare aid packages offered by different institutions. The form would also make the total costs — and risks — of the student loans clear before they enroll by outlining their total estimated student loan debt, monthly loan payments after graduation and additional costs not covered by federal aid.
The CFPB is taking feedback on how to further improve the form, especially looking for input from college students and their families. They can log onto www.consumerfinance.gov/students/knowbeforeyouowe/ to sign up to provide feedback on the CFPB’s website.
Building on the model of the “Financial Aid Shopping Sheet”, the President has also tasked the Chief Technology Officer with further leveraging data and technology to help provide college- bound students and parents with more comparative information about college costs and college aid so they can make more informed decisions about where to enroll.
In addition, the U.S. Small Business Administration, as part of the White House-led Startup America initiative, has launched a website (www.sba.gov/startupamerica/student-startup-plan) to walk young entrepreneurs through the process of reducing their monthly student loan payments.
Also, in response to the President’s call to action to promote high-growth entrepreneurship across the country, today the Young Entrepreneur Council’s new private-sector Gen Y Fund has committed to investing $10 million in as many as 100 Millennial-generation startups, including a promise to pay down any of these young entrepreneurs’ remaining federal student loan obligations over the next three years.
Here are some examples of how the new initiatives would work:
“Pay As You Earn” proposal allows borrowers to cap their student loan payments at 10% of discretionary income as soon as 2012. The Administration estimates that this cap will reduce monthly payments for more than 1.6 million student borrowers.
o A nurse who is earning $45,000 and has $60,000 in federal student loans. Under the standard repayment plan, this borrower’s monthly repayment amount is $690. The currently available IBR plan would reduce this borrower’s payment by $332 to $358. President Obama’s improved ‘Pay As You Earn’ plan will reduce her payment by an additional $119 to a more manageable $239 — a total reduction of $451 a month.
o A teacher who is earning $30,000 a year and has $25,000 in Federal student loans. Under the standard repayment plan, this borrower’s monthly repayment amount is $287 . The currently available IBR plan would reduce this borrower’s payment by $116, to $171. Under the improved ‘P ay As You Earn’ plan, his monthly payment amount would be even more manageable at only $114. And, if this borrower remained a teacher or was employed in another public service occupation, he would be eligible for forgiveness under the Public Service Loan Forgiveness Program after 10 years of payments .
Help for those already in the workforce. Recent graduates and others in the workforce who are still struggling to pay off their student loans can immediately take advantage of the current income-based repayment plan that caps payments at 15% of the borrower’s discretionary income to help them manage their debt. Currently, more than 36 million Americans have federal student loan debt, but fewer than 450,000 Americans participate in income-based repayment. Millions more may be eligible to reduce their monthly payments to an amount affordable based on income and family size. The Administration is taking steps to make it easier to participate in IBR and continues to reach out to borrowers to let them know about the program .
Borrowers looking to determine whether or not income-based repayment is the right option for them should visit www.studentaid.gov/ibr.
The CFPB also released the Student Debt Repayment Assistant, an online tool that provides borrowers, many of whom may be struggling with repayment, with information on income-based repayment, deferments, alternative payment programs, and much more. The Student Debt Repayment Assistant is available at ConsumerFinance.gov/students/repay
Improve Ease of Making Payments and Reduce Default Risk by Consolidating Loans
Provide a discount on consolidation loans. While all new federal student loans are now Direct Loans thanks to the historic reforms in the Health Care and Education Reconciliation Act, there are still $400 billion outstanding in old Federal Family Education Loans. These loans offer fewer repayment options and are unnecessarily expensive for taxpayers. In addition, about 6 million borrowers have at least one Direct Loan and at least one FFEL loan, which requires them to submit two separate monthly payments, a complexity that puts them at greater risk of default.
To ensure borrowers are not adversely impacted by this transition and to facilitate loan repayment while reducing taxpayer costs, the Department of Education is encouraging borrowers with split loans to consolidate their guaranteed FFEL loans into the Direct Loan program. Borrowers do not need to take any action at this time. Beginning in January 2012, the Department will reach out to qualified borrowers early next year to alert them of the opportunity.
This special consolidation initiative would keep the terms and conditions of the loans the same, and most importantly, beginning in January 2012, allow borrowers to make only one monthly payment, as opposed to two or more payments, greatly simplifying the repayment process. Borrowers who take advantage of this special, limited-time consolidation option would also receive up to a 0.5 percent reduction to their interest rate on some of their loans, which means lower monthly payments and saving hundreds in interest. Borrowers would receive a 0.25 percent interest rate reduction on their consolidated FFEL loans and an additional 0.25 percent interest rate reduction on the entire consolidated FFEL and DL balance.
o A borrower about to enter repayment with two $4,500 FFEL Stafford loans (at 6.0%) and a $5,500 Direct Stafford loan (at 4.5%). Under Standard Repayment, the borrower can expect to pay a total of $4,330 in interest until the loans are paid in full. If this borrower consolidates their FFEL loans under this initiative they would save $376 in interest payments, and make only one payment per month, instead of two.
o A borrower in repayment with a $32,000 FFEL Consolidation loan (at 6.25%) and a $5,500 Direct Unsubsidized Stafford loan (at 6.8%). Under Standard Repayment, the borrower can expect to pay a total of $13,211 in interest until the loans are paid in full. If this borrower consolidates the FFEL loan under this initiative they would save $964 in interest payments, and make only one payment per month instead of two.
A Critical Issue for Millions
Outstanding student debt now tops $1 trillion, exceeding even total credit card debt, and the crushing burden often affects the job choices graduates make and cuts into their ability to own a home, provide for family or save for retirement or their children’s college educations. And it has figured into the rising discontent that is fueling the Occupy Wall Street movement.
“In the past month, over 30,000 individuals had signed petition on the We the People platform on whitehouse.gov asking President Obama to reduce the burden of student loan,” Melody Barnes, Director of the Domestic Policy Council, told reporters prior to the official announcement. “They rightly pointed out that the weight of this debt is preventing graduates all over the country from achieving their dream. The message was received loud and clear, and one that President Obama, who took 10 years to pay off his loans, is happy to address.”
“This is an extraordinarily exciting time,” added Education Secretary Arne Duncan. “President Obama will use his executive authority to give millions of students and graduates with relief – by building on historic student loan reforms passed last year, when Congress approved reducing the subsidy to private banks and invest $40 million into Pell grants.”
President Obama is exercising executive authority to lower student debt, taking actions that he can through his regulatory authority, without Congressional approval.
They are part of a stepped up series of initiatives under a “We Can’t Wait” banner ” to put Americans back to work and strengthen the economy because can’t wait for Congressional Republicans to act,” Barnes told reporters.
“For many who struggle, who are in lower paying jobs, these initiatives could reduce payments by hundreds of dollars every month.
“The changes will make a big difference in lives of current students and recent graduates, all of this at no cost to the taxpayer.”
Karen Rubin, Long Island Populist Examiner
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