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Details On the President’s Student Loan Initiative

October 26, 2011 | Adam S. Minsky, Esq. Policy & Reform

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We now know what the President’s student loan initiative entails. Unfortunately, while early reports indicated that the initiative involved a “debt swap” that allowed private student loans to be consolidated into federal student loans, it is now clear that this this is far from true. The initiative still has some real benefits for student loan borrowers, but it is significantly limited.

Improved Income-Based Repayment. If you remember, Income-Based Repayment (“IBR”) for federal student loans caps your monthly payment at approx. 15% of your discretionary income, regardless of how much federal student debt you have. This is a huge benefit. Moreover, after 25 years of payments, whatever remains is forgiven.

In 2014, IBR was slated to improve for new borrowers by lowering the payment even further, to 10% of discretionary income, and reducing the repayment period to 20 years. The President has bumped-up the IBR improvement from 2014 to 2012, effectively giving new student borrowers greater relief two years sooner than planned. The changes could lead to a 33% reduction in monthly student loan payments for a borrower on IBR, and knocking off 5 years of payments is a big deal too. However, an important point here is that these changes do not apply to people who are already on IBR; it only applies to students who select IBR starting in 2012.

Loan Consolidation Incentive. While early reports indicated that the President’s proposal involved relief for private student loan borrowers through consolidation, we now know that is not true. This portion of the initiative is geared towards federally-backed loans with a private lender (such as Sallie Mae), entirely different from purely private student loans. Although these loans are already eligible for Direct federal loan consolidation (which is not made clear in the administration’s press release), the initiative encourages students to consolidate their loans through the Direct federal lending program by offering a 0.5% interest rate reduction. Importantly, by consolidating through Direct loans, borrowers might become eligible for IBR.

Although the initiative will produce a real, concrete benefit for millions of borrowers, it falls well short of initial expectations, and does not do much to provide relief for borrowers who are struggling under the weight of oppressive private student loan debt. The IBR changes will only impact people who have not yet selected IBR as their repayment plan, and the interest-rate consolidation incentive is a modest offer for a consolidation program that, essentially, already exists.

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Policy & Reform

About Adam S. Minsky, Esq.

Adam S. Minsky founded the first law office in Massachusetts devoted entirely to assisting student loan borrowers, and he is one of the only attorneys in the country practicing in this area of law. He provides counsel, legal assistance, and direct advocacy for borrowers on a variety of student loan-related matters. He regularly speaks to students, graduates, and advocates about the latest developments in higher education financing.

Books by Adam S. Minsky

The Student Loan Handbook for Law Students and Attorneys

The Student Loan Handbook for Law Students and Attorneys

Student Loan Debt 101

Student Loan Debt 101: The Definitive Guide to Understanding and Managing Your Student Loans

Student Loans for Parents and Cosigners

The Student Loan Guide for Parents and Cosigners

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Boston, MA 02110

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