Taking advantage of new student loan assistance
— -- The Occupy Wall Street protesters who are holding vigil in cities across the country have a lot of grievances, but there appears to be general consensus on a couple of issues. They're not particularly fond of big banks. And they desperately want relief from student loans.
About two-thirds of graduates with a bachelor's degree have student loans, according to the College Board. While the average debt is about $24,000, 10% of undergraduates have loans of $40,000 or more, according to the Project on Student Debt.
Student loans are usually manageable for graduates who land a good job, but these days, a good job is hard to find. Borrowers who fall behind on their payments because they're unemployed or underemployed often end up even deeper in debt because interest and penalties inflate the amount they owe.
Last week, the Obama administration unveiled a plan to help borrowers dig their way out of debt. Here's a look at the changes:
•Loan consolidation. For a limited time, borrowers who have both Federal Family Education Loans and Direct Loans can get a modest reduction in their interest rate by consolidating their loans. FFEL loans are federally guaranteed loans issued by private lenders; Direct Loans are issued directly by the government. This special consolidation loan will be available January through June 2012.
The downside: Modest is the operative word here. Eligible borrowers will receive a 0.25 percentage-point interest-rate reduction on their consolidated FFEL loans. They'll qualify for another 0.25 percentage-point reduction if they arrange for automatic debit of their payments.
The benefit: Even though the interest rate cut is small, consolidating FFEL loans into the Direct Loan program is a good housekeeping move for many borrowers, says Patrick Kandianis, co-founder of SimpleTuition, a loan-comparison website.
In addition, eligible borrowers who work for 10 years in a public service job can have the balance of their federal student loans discharged.
•Expanded income-based repayment. The income-based repayment program, launched in 2009, is designed to help borrowers who don't earn enough to make their loan payments, which are typically based on a 10-year repayment term.
Currently, borrowers who qualify for the IBR program can have loan payments capped at 15% of their discretionary income. After 25 years of qualifying payments, the balance of the loan will be forgiven. Under the administration's plan, payments will be capped at 10% of discretionary income and forgiven after 20 years.
The downside: The more generous formula is limited to borrowers who have federal student loans issued after 2012, Kandianis says. Most graduates aren't eligible.
The benefit: Just because you don't qualify for the beefed-up IBR doesn't mean you shouldn't apply. If you have a low-paying job — or no job at all — the existing formula could still provide relief and help you avoid default.
Advocates for student borrowers hope the administration's announcement will encourage more graduates to take advantage of IBR. About 450,000 borrowers have signed up, says Lauren Asher, president of the Institute for College Access and Success. "There are millions more borrowers out there that could be benefiting from IBR right now," she says.
Who won't benefit
There are two types of borrowers who won't be helped by the changes announced last week:
•Borrowers with private student loans. These loans are typically used to cover costs that exceed the annual limits on federal student loans. They lack most of the protections attached to federal student loans.
•Borrowers in default. The income-based repayment program and the new consolidation option aren't available for borrowers who have defaulted on the federal student loans. The American Student Assistance offers tips on how to recover from default at www.asa.org.
