New student loan repayment plan now in effect
Washington, D.C. — As of Wednesday, a major new student loan repayment option became available for the first time, and current and former students also will see other changes in their student aid that will help them meet rapidly rising tuition costs.
In 2007, Congress passed the College Cost Reduction and Access Act, which invested more than $20 billion to increase student aid and cut student loan interest rates in half over four years. Sen. Tom Harkin is the chairman of the Senate panel that funds education initiatives and a senior member of the Health, Education, Labor and Pensions Committee.
“This is welcome news for all borrowers — but particularly recent graduates in Iowa and around the country who are struggling to find a job in this economic downturn while grappling with high student loan interest rates,” Harkin said. “Students seeking a college degree shouldn’t have to resign themselves to the life long burden of a mountain of debt. It is our responsibility to make a college education accessible to all.”
Income-Based Repayment (IBR), a provision in The College Cost Reduction and Access Act that takes effect tomorrow, caps monthly federal loan payments at an affordable level based on income and family size, and forgives any debt and interest that remains after 25 years. If a borrower owes more on their federal student loans than they earn in a year, they can probably benefit from IBR — the lower the income, the lower the monthly payment will be. IBR is available for almost all federal loans — past, present or future — made by any lender, whether for college or graduate school.
Although this repayment option will likely require a longer repayment period, borrowers who go to work in a government, nonprofit or other public service job could have their remaining student loan debt forgiven after just 10 years of repayment through the Public Service Loan Forgiveness Program, also included in the College Cost Reduction and Access Act. Eligible loans have to be in the federal Direct Loan Program to qualify, but the 10 years don’t have to be consecutive. A total of 120 payments are needed while working full-time for a public or nonprofit employer, starting on or after Oct. 1, 2007. Borrowers interested in the loan forgiveness program do have the option of reconsolidating their loans with the Direct Loan program.
As the cost of college has skyrocketed over the years, the buying power of federal grant aid has fallen, forcing many students to turn to private loans with high interest rates. According to the Iowa College Student Aid Commission between the 2000-2001 and 2008-2009 school years, the cost of attending (including tuition, fees, room and board) a four-year public college in Iowa increased 79 percent, from $7,592 to $13,591. Currently, 73 percent of Iowa students at four-year colleges and universities graduate with debt and the average amount of debt is $26,208 — the highest rate in the country.
In addition to the IBR plan, students and current borrowers will benefit from:
• Lowered cost of federal student loans. The interest rate for subsidized Stafford loans will be lowered from 6.0% to 5.6%. These loans usually go to students from families making under $80,000 and accrue no interest while the student is in school.
• Increased maximum Pell grant award. The Pell grant award goes up from $4,731 to $5,350 this year. Pell Grants are need-based grants from the federal government and go mostly to students with family incomes below $50,000.
• Borrowers with Variable-Rate Loans can lock in new low rates. All unconsolidated Stafford loans taken out before July 1, 2006, have variable interest rates that reset each year. The variable rate is going down to 2.48 percent. Borrowers can lock in this low rate by consolidating variable-rate loans after July 1.
