Financial Aid: Relief for Select Student Loan Borrowers on Horizon

By Purnell T. Cropper | November 15, 2011

Obama administration officials recently announced two initiatives aimed at lowering monthly student loan payments for borrowers having difficulty repaying their federal student loans. The White House seeks to implement these executive actions without Congressional approval. (Video of the announcement.)

Under the administration’s plan:

  • Students with both Federal Family Education Loans (FFEL—those loans borrowed through banks) and Federal Direct Loans will be offered an incentive to participate in a special consolidation into the Direct Loan program. (Note that students entering Arcadia University as first-year undergraduates since spring 2009 only have Federal Direct Loans and therefore would not qualify for the special consolidation.)
  • More generous income-based repayment (IBR) terms will be fast-tracked to become effective in 2012 instead of 2014.

Currently, nearly six million students have loans from both FFEL (bank-based) and Direct Loan (DL) servicers. The administration plans to offer repayment incentives for students with split servicers if they move all of their loans over to be DL’s. Specifically, students would be able to receive up to a 0.5 percent reduction to the interest rate on some of their loans. Students would be able to do this beginning January 1, 2012, and through June 30, 2012.  This will be a “special” consolidation in that students will be able to keep the terms and conditions of their initial loans. The new plan would be available to students who are currently in school and receive a federal loan in 2012.

In 2010, Congress passed changes to the IBR program to limit monthly payments to 10% of discretionary income (down from the current 15%) and forgiving remaining debt after 20 years (down from the current 25 years). The Obama administration hopes to implement these changes, termed the “Pay As You Earn” plan, two years ahead of schedule, beginning in 2012.