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Obama's Reforms

We promised in last week’s mailbag that this week we would cover the details of President Obama’s new executive order to make it easier for students to repay their federal student loans. Promise made; promise kept.

For your convenience, we’re going to break this into three parts. First up…

Loan Consolidation

There used to be two programs for borrowing federal loans, but the Health Care and Education Reconciliation Act of 2010 abolished the Federal Family Education Loan (FFEL) Program leaving only the Federal Direct Loan Program (Federal Direct) for new borrowers. However, a lot of us still have FFEL loans. (There are $400 billion in FFEL loans outstanding.) If you don’t know if your loans are FFEL or Federal Direct, go to the National Student Loan Data System to look them up.

In addition, approximately 6 million borrowers have at least one Direct Loan and at least one FFEL loan. Having multiple loans requires you to submit separate monthly payments and can put you at greater risk of default. If you consolidate your loans, you will only have to make one monthly payment and are less likely to default.

The President’s proposed loan consolidation initiative temporarily provides special benefits designed to encourage borrowers with at least one FFEL and one Federal Direct loan to consolidate their FFEL loans into a Special Direct Consolidation Loan. The administration has its own reasons for doing this. As we said, simplifying payment reduces the risk of default – that’s good for you and for the federal government. And transferring FFEL Loans to the Federal Direct program reduces costs for the Department of Education.

As we mentioned last week, these new initiatives will not allow you to your convert private loans to Federal Direct loans.

So what are the benefits for you? Obviously, you will only have one loan to repay. You will also be eligible for a 0.25 percent interest rate reduction on the FFEL loans you consolidate. Finally, if the loan is repaid through the Department’s automatic debit system, you will receive an additional 0.25 percent interest rate reduction on the entire consolidated loan balance. That may not sound like a lot, but it will translate to a lot less accrued interest over the life of your loan.

Overall, these are benefits worth taking advantage of, especially if you work for a public or nonprofit employer and want to take advantage of Public Service Loan Forgiveness (PSLF). Only Federal Direct loans are eligible for PSLF, so you would have to convert your FFEL loans anyway.

If you do want to apply, keep in mind that you can only do so from January 1, 2012 through June 30, 2012. The Department of Education says it will reach out to qualified borrowers beginning in January 2012 to alert them of the opportunity. If you don’t hear from them, call 1-800-4-FED-AID (1-800-433-3243).

Income-Based Repayment

Income-Based Repayment (IBR) is a repayment plan created by the College Cost Reduction and Access Act of 2007. It currently limits your monthly student loan payments amount to 15 percent of your discretionary income and provides forgiveness of your student loans after 25 years. In 2010, Congress enacted provisions designed to cap monthly payments at 10 percent of discretionary income and provide for forgiveness after 20 years starting in 2014.

The President’s “Pay As You Earn” proposal will speed up the adoption of these provisions and make them available to new borrowers beginning in 2012. (This fact sheet released by the administration has some good examples of how the change will benefit those new borrowers.) The Administration estimates that this will reduce monthly payments for more than 1.6 million student borrowers.

Unfortunately, the proposal is limited to “new borrowers,” who are defined as borrowers who took out their first loans in 2008 or later and who will take out at least one loan in 2012 or later. As a result, borrowers with loans from 2007 and earlier, students who graduated in 2011 or earlier and borrowers already in repayment will not be able to benefit from these changes to IBR.

Consumer Protection

The Consumer Financial Protection Bureau (CFPB) and the Department of Education are also collaborating on two new projects to assist students and graduates.

Know Before You Owe  is a model financial aid disclosure form colleges and universities can use to help students compare the real costs of different college options. They want feedback on what is and is not helpful, so chime in.

The Student Debt Repayment Assistant is designed to give you guidance in dealing with your student loans. If you are unsure that you can repay your federal loans, it leads you to options such as IBR, deferment and forbearance. Note to CFPB: this would also be a good place to mention Public Service Loan Forgiveness.

If you have private loans, it tells you to contact your loan servicer and ask about graduated repayment or extended repayment plans and deferment or forbearance. They do have the grace to note that your non-federal loans don’t have a common set of consumer protections when it comes to deferment and forbearance. Hopefully you already know about the benefits of federal loans.

If you have more questions, attend our upcoming webinars on Thursday, December 1 or Friday, December 16. We’ll review these changes and a lot more, including an in-depth discussion on Public Service Loan Forgiveness and Income-Based Repayment.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works' educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.

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