President Barack Obama's new student loan relief plan may be less than meets the eye: It will not do anything to alleviate the pain for the millions of borrowers who have private student loans, and its centerpiece merely accelerates by two years a program to lighten the load for low-earning federal borrowers.
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While it may not solve all troubles related to the almost $1 trillion in education indebtedness now burdening graduates and dropouts alike, it does have the potential to help millions of federal borrowers lower their payments or their interest rates -- if they play their cards right. And it may be as far as a president is able to go without congressional action.
``This is an important positive step,'' says Lauren Asher, president of the College Access and Success, an advocacy organization. To make the most of the program, borrowers have to take the right steps for themselves. Here's what you should do, depending on your circumstances:
--If you are out of school and have a lot of different federal loans.
Your loans might be a mix of direct federal loans and loans that were issued by private lenders but guaranteed by the federal government. (Those are called Federal Family Education Loan Program, or FFELP loans). Beginning on Jan. 1, you can consolidate all of those loans into a single direct federal loan -- and get a discount off of your interest rate.
It works like this: You can already consolidate FFELP and direct loans at an interest rate that is the average of the rates on your loans, rounded up to the nearest eighth of a percent. The new program will offer additional rate cuts of 0.25 percentage points on your FFELP rates and an additional 0.25 percentage points on the entire loan, if you agree to an automated payment from your checking account.
But, move quickly in 2012, counsels Mark Kantrowitz, publisher of Finaid (http://www.Finaid.org) and a financial aid expert. The Budget Control Act of 2011 eliminates discounts like this from the student loan program, beginning July 1. It wouldn't raise rates for those who lock in these consolidated loans, but could close the window for new consolidators.
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Not everyone will want to jump on this offer. If you have a mix of direct and FFELP loans with a broad range of interest rates -- say from 3.4 percent to 6.8 percent -- and you are paying off the higher rate loans at an accelerated pace, you may end up picking up more interest rate costs if you roll them all together and take a blended rate, even with the discounts.
--If you are still a student, or about to enroll
Obama sweetened the existing income-based repayment plan for some 1.6 million current student borrowers. Once they leave school, they will be able to limit their repayments to 10 percent of their discretionary income if they are in low-paying occupations.
If they still have loan balances after 20 years of paying, the remainder of their loan would be forgiven. That offers some financial solace to people who choose typically low-paying service or artistic work. Those changes were scheduled to go into effect in 2014; now they will be accelerated into 2012.
Folks who have already left school and begun working can already opt into an income-based repayment plan, but it is somewhat less generous. Payments are limited to 15 percent of discretionary income, not 10 percent. And it takes 25 years before loan balances are forgiven.
Is this a good deal? Maybe. Stretching out payments over a longer period of time does allow more household income to go towards real life needs like mortgages and groceries. And stretching out a very low-interest rate loan as long as possible, when you believe rates will rise in the future, can make sound financial sense. But so does paying of a loan faster, especially if you can afford to make the payments.
--If you have private loans
Sorry, you're on your own. Without any authority to compel private lenders to lower their rates or forgive big balances, the White House hasn't addressed these loans, estimated by Kantrowitz to make up almost 1 in 6 of every student loan dollar. Private loans tend to be costlier than federal loans and issued at variable rates that can go sky high. They are also lacking in some advantages, such as access to the federal income-based repayment programs, says Asher, who recommends new borrowers limit their private loans.
Former students who are having trouble repaying their private loans should reach out to the lenders and see if they can get any forbearance. But those decisions are typically subjective and based on the goodwill of the lender.
The newly-formed Consumer Financial Protection Bureau is taking a closer look at those loans, and has recently published a tool that can help borrowers figure out how to organize and repay their student loans. The student debt repayment assistant tool (http://www.consumerfinance.gov/students/repay) can help you figure out which of your loans are direct, FFELP and private and then link you to a variety of repayment plans. Once that's organized, you'll have time for all those grad school applications.