Will the President’s Student Loan Initiatives Help You?
On October 25, 2011, the Obama administration announced executive orders designed to assist struggling student loan borrowers in spite of Congressional inaction.
The President announced two new student loan initiatives:
- Pay As You Earn, making the Income-Based Repayment plan more generous for certain borrowers by fast-tracking improvements to the way payments are calculated and reducing the time it takes to earn forgiveness, and
- “Special” Consolidation Loans providing a modest interest rate reduction for student loan borrowers who have a specific combination of student loans.
Is Income-Based Repayment Available Now?
Yes! Right now, Income-Based Repayment allows student loan borrowers to cap monthly payments at 15% of their discretionary income and have any remaining balance canceled after 25 years. Income-Based Repayment has helped about half a million student loan borrowers so far. Many more borrowers can lower their student loan payments using Income-Based Repayment right away.
In the 2010 State of the Union address, the President proposed – and Congress enacted – improvements to the way payments are calculated under Income-Based Repayment. The changes reduce the cap on monthly payments from 15% to 10% of discretionary income, and provide forgiveness after 20 years instead of the current 25 years. These improvements were scheduled to take effect for people borrowing new loans in 2014 and beyond.
The administration has put forth a proposal to fast track these improvements to Income-Based Repayment so that some borrowers can take advantage of the more generous calculations as soon as 2012. That’s the President’s “Pay As You Earn” initiative.
Who Will Have Access to Even Lower Payments Using the New “Pay As You Earn” Program?
The administration estimates that Pay As You Earn will reduce monthly payments for more than 1.6 million student borrowers. Early information from the administration indicates thatthese improvements will be available starting in 2012, for students who first borrowed federal student loans in 2008 or later, and who also borrow a federal student loan in 2012. Many specific details are not yet available and will likely not be addressed until after an upcoming rulemaking process.
However, we may see some additional details in response to a request by Republican Representative John Kline. Representative Kline has requested more information, including an explanation of how Pay As You Earn would impact taxpayers.
Can I Lower My Interest Rate Using a “Special” Consolidation Loan?
That depends (of course!). Only borrowers who have “split loans” can take advantage of the “Special” Consolidation Loan. If you have at least one federally held loan and at least one commercially held loan, then you have “split loans” and you should be able to get a Special Consolidation Loan.
Here’s how to understand whether you have “split loans”:
- First, figure out if you have at least one FFEL loan.
- If you do, make sure that at least one is still a commercially held loan.
- Finally, figure out whether you also have at least one federally held loan.
Step 1. How to figure out if you have at least one FFEL loan
If you borrowed your first federal student loan after July 1, 2010, you definitely didn’t borrow a FFEL loan, so you don’t have “split” loans, and you aren’t going to be invited to enjoy a “Special” Consolidation Loan. No one whose only federal loans were borrowed after July 1, 2010 will have access to the “Special” Consolidation Loan. Sorry.
If you borrowed a federal student loan before July 1, 2010, you might be a redneck have a FFEL loan. Every FFEL loan was borrowed before July 1, 2010, but not every federal loan borrowed before July 1, 2010 was a FFEL loan (some were Federal Direct), and not all FFEL loans are still commercially held loans (although they all started out that way).
Use the National Student Loan Data System to see what you’ve got. A FFEL loan should be labeled “FFEL” and have your lender listed as somebody other than the U.S. Department of Education (like Sallie Mae, Nelnet, CitiBank).
If you think you know that you borrowed a FFEL loan, double check. It’s possible that you borrowed a FFEL loan but don’t have one anymore, because you consolidated into Federal Direct.
Have at least one FFEL loan? Move on to Step 2, determining whether the FFEL loan is “commercially held”.
Don’t have at least one FFEL loan? No “Special” Consolidation Loan for you.
Step 2. How to determine if a FFEL loan is commercially held
If you borrowed a FFEL loan, you got it from a commercial lender, but that loan may or may not still be commercially held. The U.S. Department of Education had to buy a bunch of FFEL loans during the credit crisis, and the FFEL loans that the government bought are no longer commercially held.
In the National Student Loan Data System, commercially held FFEL loans should be labeled “FFEL” and have your lender listed as somebody other than the U.S. Department of Education (like Sallie Mae, Nelnet, CitiBank). If your lender is listed as the U.S. Department of Education, then your loan is federally held, not commercially held.
If you have at least one commercially held FFEL loan, move on to Step 3, determining whether you also have at least one federally held loan.
If you don’t have at least one commercially held FFEL loan, no Special Consolidation Loan for you. Sorry.
Step 3: How to figure out if you have a federally held loan
There are two kinds of federally held loans: 1) Federal Direct loans, and 2) FFEL loans that were purchased by the federal government. All Federal Direct loans are federally held loans, but only some FFEL loans are federally held (others are commercially held).
You have to have either a Federal Direct loan, or a FFEL loan that was purchased by the federal government in order to have a federally held loan.
If you borrowed a federal student loan after July 1, 2010, you definitely have a Federal Direct Loan. Everyone who borrowed a federal student loan after July 1, 2010 got a Federal Direct Loan. All Federal Direct loans are federally held loans.
If you borrowed a federal student loan before July 1, 2010, you might have borrowed a Federal Direct Loan. Go to the National Student Loan Data System to check. A Federal Direct loan should be labeled “Direct” or “William D. Ford” and have your lender listed as the U.S. Department of Education.
If you borrowed a federal student loan before July 1, 2010, you might have borrowed a FFEL loan. If you borrowed a FFEL loan, the federal government might have purchased your FFEL loan. If the federal government purchased your FFEL loan, you have a federally held loan. Go to the National Student Loan Data System to check. A federally held FFEL loan will list your lender as the U.S. Department of Education.
You can’t necessarily assume that if you borrowed a Federal Direct loan a long time ago, that you didn’t later consolidate it into a FFEL consolidation loan. Some folks consolidated all their Federal Direct loans into FFEL consolidation loans (those used to be available, mostly before 2008). Check in that same database: NSLDS.
If you don’t have at least one federally held loan, you can’t get the “Special” Consolidation Loan. Sorry.
If I have at least one federally held loan and at least one commercially held loan, what should I do?
Borrowers with at least one commercially held FFEL loan and at least one Federal Direct Loan, will be offered an incentive to participate in a Special Consolidation into the Direct Loan program.
These borrowers can get up to a 0.5 percent reduction to the interest rate on some of their loans— .25 percent reduction on consolidated FFEL loans and another .25 percent reduction on the entire consolidation loan if you choose automatic debit. If you are eligible for a “Special” Consolidation Loan, you should be notified in January.
You might want to take advantage of the Special Consolidation Loan to lower your interest rate. If you want the Special Consolidation Loan, you MUST NOT consolidate right now, or you will lose your access to the “Special” Consolidation Loan. Unfortunately, waiting to consolidate may increase interest costs for some borrowers. It isn’t yet clear how these costs will be determined.
The Special Consolidation Loan will be available for a limited time from January 1, 2012 through June 30, 2012. After June 30, 2012, the Budget Control Act eliminates the Department of Education’s authority to provide this sort of incentive to borrowers.
