It’s a tough year for college students – and student loan borrowers, in general: the unemployment rate is high, subsidized graduate school loans are slated for elimination next year, and tuition is rising. But there’s potential good news, in the form of a recent executive order issued by President Obama designed to help some borrowers repay their student loans. It’s been dubbed by some as a student loan bailout.
But how will the executive order help you — and can these changes be made without Congress?
Before I go on, it’s time to bust a myth. The ability to consolidate private loans and federal loans together is relatively nonexistent. In actuality, you could always consolidate loans made by banks that were issued by the Federal Family Education Loan (FFEL) Program with loans directly made by the federal government. The difference is an interest rate reduction of up to .5% when you consolidate both types of loans —half of which is the .25% discount for choosing to make payments by direct debit that’s already available. The executive order doesn’t need Congressional approval, and you can take advantage of this offer beginning in January.
There are cases where consolidating will cost you money. Let’s say you consolidated your older loans when there was a repayment benefit frenzy a few years ago, and you have new direct loans from returning to school. For instance, I received a 2% interest rate discount after 36 on time payments. If I consolidated with a new direct loan, I lose my 2% interest rate discount to take advantage of a measly .5% interest rate reduction. However, I could skip the interest rate deduction and consolidate new federal loans without my initial consolidation loan. These new loans could potentially qualify for new income-based repayment guidelines and would still qualify for the .25% direct debit deduction. Always compare options by utilizing the student loan calculator links on the resources page of graduationdebt.org.
Pay as You Earn
Income-based repayment has already existed for a few years, but with a longer pay-off time and higher payments. Prior to the new executive order, income-based repayments were capped at 15% of your discretionary income. The new plan caps payments at 10% of your discretionary income. For some, the difference is well over $100. Plus, pay-off time is shortened to a maximum of 20 years instead of 25 years; whatever balance remains unpaid after 20 years of on-time payments is forgiven by the government. Payments change each year based on your annual income. To figure out what the difference is for you, click on this link for income-based repayment calculators from the article and resources page of graduationdebt.org.
Do the Changes Require Congressional Approval?
No. However, income-based repayment changes are required to go through negotiated rule-making, a process by which stakeholders, such as borrowers and banks, meet to discuss the proposed rule changes and possibly amend them. There is no guarantee the income-based repayment changes will go through as proposed.
- According to a Department of Education representative, the new plan only benefits borrowers with loans exclusively dated fiscal year 2008 or later (Oct. 1, 2007 or after) who also borrow or consolidate after July 1,2012. In other words, don’t consolidate your loans until July 1, 2012 if you might qualify for reduced income-based repayment. Loans made after July 1, 2012 could also qualify.
- Until negotiated rule making takes place, nothing is concrete. It’s possible older loans could qualify as well, but more than likely only if you also have newer loans.
Unless all your loans are pre-2008 or you wouldn’t qualify for the new version of income-based repayment, wait to consolidate until negotiated rule making happens. You want to weigh all your options. Take your time in choosing the best plan for you. Choosing too early can be a costly mistake.
Reyna Gobel is a freelance journalist who specializes in financial fitness. She is also the author of Graduation Debt: How To Manage Student Loans and Live Your Life.