New student-loan relief program offers modest help

Oct 27 2011 - 2:06pm

Around the same time the College Board this week released a report showing that the average tuition at a four-year public college rose 8.3 percent last year, President Barack Obama was in Denver telling college students that he is taking steps to ease their debt burden.

Students who look into the details of the loan-relief program are likely to be underwhelmed.

The U.S. Education Department announced some of the details Tuesday. They involve two changes to federally backed student loans such as Stafford, Plus and Perkins loans. Not all of these loan types will be eligible for both of the improvements. Neither of the changes will apply to private student loans that are not government-guaranteed.

Here's a look at the two changes:

-- Special Direct Consolidation Loans. Students who have two types of federal loans and consolidate them can lower their interest rate by a quarter of a percentage point on some of their loans. This will mainly affect a group of borrowers who have already graduated or left school.

To qualify, you must have two types of federal loans -- at least one issued by the Department of Education under the direct loan program and at least one issued by a bank or other lender under the Federal Family Education Loan program. The FFEL program ended in July 2010, and since then all new federal loans are direct loans.

If you consolidate these loans into the direct program between Jan. 1, 2012 and June 30, 2012, the government will reduce your rate on the FFEL loans only by 0.25 percent. The rate on your direct loans will remain unchanged.

How much will this save? Not much.

If you have $20,000 in FFEL loans at 6.8 percent and repay them over 10 years, the quarter-point rateI cut will save you $2.56 a month or $307 over 10 years. (You can do this calculation with your own loans at www.mappingyourfuture.org/paying/standardcalculator.htm.)

Before making this switch, make sure you won't be worse off. Prior to the financial crisis, some private-sector lenders offered substantial discounts on FFEL loans -- up to 2 percent -- if you made a certain number of on-time monthly payments, such as 48. Before moving into the direct loan program, find out if you would have to give up this rate reduction, or the chance to get it.

In its promotional materials, the Education Department says borrowers who consolidate under this new program can get an additional 0.25 percent discount on all of their loans if they sign up for automatic payments.

But this rate cut is already available for all borrowers in the direct loan program (and many in FFEL loans) who sign up for electronic billing and auto pay, says Mark Kantrowitz, publisher of Finaid.com. So it's not really an enhancement to the program.

The department says about 6 million borrowers could get this break. It adds that encouraging FFEL borrowers to move their loans into the direct program will save the government money on servicing costs and cut down on defaults if borrowers have only one monthly payment to make instead of two or more.

-- Pay as You Earn. The other change will mainly affect students who are in college today and will be next year. They might qualify for a new program dubbed Pay as You Earn, which is an enhanced version of an existing program called Income Based Repayment.

IBR helps borrowers who owe a lot relative to their income. In general, borrowers could qualify if their student loans exceed what they make in a year, although borrowers with smaller debt loads might qualify if they have a family, said Lauren Asher, president of the Institute for College Access & Success.

Under IBR, student loan payments are capped at 15 percent of a figure known as discretionary income. Any remaining debt is forgiven after the borrower has made payments under IBR for 25 years (which do not have to be consecutive) or after 10 years if the borrower works in a public-service or nonprofit job.

Under a law passed last year, borrowers who take out their first loan in July 2014 or later and enter IBR will have their payments capped at 10 percent of discretionary income instead of 15 percent and any remaining debt forgiven after 20 years instead of 25 (for private-sector jobs). Those enhancements won't be available to today's students or people who have already graduated.

Pay as You Earn accelerates the start date of the 2014 changes to help students who are in school today after they graduate. To qualify, you must have taken out your first federal student loan in 2008 or later and take out at least one more student loan in 2012 or later.

Justin Hamilton, a spokesman for the Education Department, said Pay as You Earn is mainly designed to help "students who entered college at the height of the financial crisis." But it won't help students who graduated during the financial crisis or before.

The administration estimates that 1.6 million student borrowers could one day benefit from Pay as You Earn. (There are about 36 million borrowers participating in the student loan program.)

It says the two new programs combined won't cost taxpayers money because savings from the loan consolidation program will offset the interest rate reductions and loan forgiveness. The programs do not need congressional approval.

The occupiers of Wall Street and elsewhere who are demanding student-debt relief won't benefit much from the two changes, Kantrowitz says.

But many could benefit from the existing IBR program, if they know about it. He estimates that only 1.25 percent of current borrowers are taking advantage of IBR, in part because it has not been well publicized.

The Education Department said Tuesday that it 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."

(E-mail Kathleen Pender at kpender@sfchronicle.com.)

(Distributed by Scripps Howard News Service, www.scrippsnews.com.)

 

From Around the Web

  +