Insights on Obama’s student loan plan
The facts of Obama’s student loan plan from my last post:
- The maximum required payment has been lowered from 15% to 10% discretionary income annually. This only applies to those who took out a loan in 2008 or later.
- It will go into effect in 2012 instead of 2014.
- Remaining debt will be forgiven after 20 yrs. instead of 25 yrs. (and with that 2 yr. speed up, that’s like 18 yrs.!)*
- If you have a loan from the Federal Family Education Loan Program and a direct loan from the government you can consolidate them at an interest rate of up to a half percentage point less. (yes, read it and weep, 0.5%!)*
- This plan does not help those with private loans, that is, loans that are NOT backed by the government.
- This plan does not help those already in default.
Additionally, the government speculates that this plan could save borrowers “several hundred dollars a month in payments.” On the other hand, other sources speculate that this plan is trivial and that a few hundred a month in payments is grossly overestimated.
The Washington Post highlights that the government is just “fast-tracking” an existing mandate. Probably the greatest upside to Obama’s announcement is that it is drawing publicity to the current Income Based Repayment program, dubbed IBR — also a rare digestive condition…
IBR is currently set at 15% with a forgiveness after 25 yrs. and will be lowered to 10% with a forgiveness after 20 yrs. True to buracracy though, it is not that easy, so I’ll let Washington Post writer Michelle Singletary explain:
Starting in 2014 and later, the cap is lowered to 10 percent and debt forgiven after 20 years. But under Obama’s plan, borrowers who took out student loans in 2008 and later — and who take out a new loan in 2012 — can get the lower cap and the loan forgiveness starting next year, Gast said.
Let me put it another way so you are clear on who will benefit from this change. The president’s plan does not affect borrowers who took on loans before 2008 and who do not take out a new loan next year. So, if you are already in repayment and are not planning to take out new student loans, this plan does not affect you.
Singletary notes the importance of making IRB a household name because while 36 million Americans have student loan debt only 450,000 are utilizing the income-based repayment progrm.
Also, The Atlantic takes a look at number 1, 3 & 4 from my list above — payment limits, loan forgiveness and consolodation.
Surprisingly The Atlantic busts the myth of this plan having a significant financial impact on borrowers. To do so they site cosolodation as the most cost-effective — right, totally wouldn’t have guessed — finding that the 0.5% rate reduction, over a ten-year span, will net a monthly savings for average borrowers ($27,204) a whopping $4.50 to $7.75. Of course, if your debt is higher you will save more; the more you buy, the more you save?
So there’s that. I love and hate The Atlantic for their thorough analysis.
Additionally, in another article The Atlantic details who exactly qualifies for IBR of 10%. This is sad news for your writer, as I took out all of my loans before 2008.
There it is. Any other wonderful articles, infographics or commentary on Obama’s student loan plan is welcome in the comments section below.