Changes are on the way for student loans

Image courtesy of MyBankTracker.com

Several of you have asked my opinion of President Obama’s recent executive order regarding student loans. Let’s take a minute to highlight the basic details.

Without getting overly political, I applaud the President’s “we can’t wait approach” as he deals with the very complex economic and political issues that the “do nothing” congress has thus far refused to handle. Whatever your political persuasion, we can probably all agree that there is plenty of blame to go around, and we just want our elected officials to step up to the plate and do their jobs.

End of rant.

The President’s directive focuses on approximately 5.8 million borrowers who have both direct government loans (DL) and also Federal Family Education Loans (FFEL) that are backed by the government. There are three (3) key provisions in the President’s order:

First, the plan provides for consolidation of the two loan types into one, and it appears that the interest rate savings associated with the consolidation will be in the range of .5 percent. In my opinion this is a good move for two reasons: it obviously helps by reducing monthly payments, but it also has the benefit of making the whole payment issue less cumbersome and therefore effectively lowers the risk of default. Pretty smart.

The second provision is that the Income-based Repayment Plan (IBR) will be modified (for borrowers who qualify for that option) by changing the “pay as you earn” percentage from the current 15% of income to 10%. I suppose an argument could be made that the positive impact of the borrower’s discretionary income will be stimulative to the economy.

Finally, for those borrowers who qualify for IBR, the “forgiveness timeline” has been reduced to 20 years (from 25), so for those who have conscientiously made their payments, after 20 years any remaining balance is forgiven.

As is the case with any policy change of this nature, you will need to do some research to see if you qualify. To get started, just follow this link.

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