Education is a dream of opportunity, and it matters. But how can higher education’s debt load be handled in a troubled, economic environment? Pressured by troubled economic conditions, students and fresh graduates are struggling with monthly loan debts. A new “Pay As You Earn” proposal made by the Obama administration will reduce monthly payments for more than one and a half million current college students and borrowers. The new “Pay As You Earn” changes will assist about 1.6 million students through the following means:
- The ability to cap their loan payments at 10 percent of discretionary income starting next year (current law waits until 2014).
- The plan will forgive the balance of their debt after 20 years of payments (instead of 25 years as allowed by current law).
- Starting in 2014, borrowers will be able to reduce their monthly student loan payments to 10 percent of their discretionary income.
- Starting this January an estimated 6 million students and recent college graduates will be able to consolidate their loans and reduce their interest rates.
Begin where the pain is
Students and workers, rightfully, see that education is critical to success, but the costs of education and the present high unemployment rate are rippling negatively into debt management. For many students, 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 provides an estimated 1.6 million borrowers with more manageable monthly payments.
Unable to wait for Congressional Republicans to act, the Obama Administration seeks to utilize a series of executive actions to put Americans back to work and strengthen the economy. President Obama indicates, “In a global economy, putting a college education within reach for every American has never been more important. 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. Changes proposed in the new “Pay As You Earn” proposal are designed to carry no additional cost to taxpayers.
Debt consolidation assistance
The Administration is also planning to offer student borrowers the chance to better manage their debt by consolidating their federal student loans. 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.
Borrowers who take advantage of this consolidation option, which begins in January, would also receive up to a 0.5 percent reduction in their interest rate on some of their loans, which means lower monthly payments that would save hundreds of dollars in interest. Eligible borrowers will be contacted by their federal loan servicer early next year with information on how to consolidate.
What to do now
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 and recent graduates can find out if they are currently eligible for Income Based Repayment by checking online at the Federal Student Aid site, where an Income Based Repayment Calculator is available.
Prevent the scars
The consequences of high unemployment, falling incomes, and reduced economic activity have both immediate and lasting consequences. The present economic recession can lead to “scarring” with long-lasting damage to individuals’ economic situations and the broader economy. Well-targeted, immediate actions and use of strategic opportunities in the Pay As You Earn proposal can lessen the pain and alleviate the depth of scarring.