New Student Loan Rules

 

President Obama recently announced new rules aimed at relieving the student loan repayment burden for graduates beginning in 2012. A recent visit to whitehouse.gov reveals an impressive graphic. 1.6 MILLIONeligible for assistance under these new rules.

The new rules include:

    1. Reduction in the minimum payment cap from 15% to 10% of your discretionary income. This program, Income Based Repayment (IBR), will remain 15% for existing borrowers.
    2. Percentage rate reduction for borrowers who consolidate existing federal loans with any Direct Loans, loans made after the Health Care and Reconciliation Act of 2008. Ideally, your repayment process will be easier with one payment thus reducing the likelihood for default.
    3. Loan balance forgiveness reduced from 25 to 20 years of payments for IBR enrollees.

 

Before we get excited about these new rules, consider this:

  1.  
    1. They take affect January 2012, but do not apply to the 36 million people currently repaying student loans.
    2. Yes, reducing your payments will provide immediate relief. However, reducing your monthly payment amount will extend the length of your repayment process and increase the amount of interest you pay overall.
    3. Planning to repay a student loan for 20/25 years to receive the loan balance forgiveness seems like a bitter piece of candy.

 

The Income Based Repayment (IBR) plan already exists. You can apply for the program and have your payments determined based on your income, expenses, state of residence and family size. The new rules just lower the maximum monthly payment cap for newer borrowers. Again, use these programs to help during tight money periods, but as soon as your income improves, you’d do better to revert back to a standard repayment plan. Contact your loan servicer (the company where you send student loan payments) to apply for an IBR program.

These rules do not apply to private student loan, Parent Plus loans, or loans in default.

My take: Use the any of the repayment assistance options (deferment, forbearance, graduated or income based repayments) available to avoid defaults. However, use them as a temporary measure to help until you can implement a long term strategy of debt elimination.

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