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More changes could be in store for student borrowers.
On September 17, the U.S. House of Representatives passed the Student Aid and Fiscal Responsibility Act of 2009 (SAFRA) by a party-line vote of 253 to 171. This legislation eliminates the federally-guaranteed student loan program and replaces it with 100% direct lending from the federal government.
SAFRA, if signed into law, will use the savings to fund an increase in the Pell Grant program among other initiatives. The US Senate is expected to consider its own version of the legislation within a few weeks.The Congressional Budget Office (CBO) estimates that ending the guarantee program would save the federal government $87 billion over the next ten years. Guaranteed loans are made by private lenders and backed by the federal government.
Education lenders countered with their own proposal, but the CBO scores it as saving $13 billion less. The Obama administration argues that the Direct Loan program saves the government money by eliminating the middleman. Much of the savings, however, comes from the federal government's lower cost of funds.
From a practical perspective, most students will not notice much of a difference between the Direct Loan and federally-guaranteed student loan programs. Money is fungible – meaning it's still green whether it comes from a bank or from the US Department of Education.
The Direct Loan program has a lower interest rate on the PLUS loan program (7.9% versus 8.5%) due to a legislative drafting error that was never corrected. PLUS loan approval rates are also higher in the Direct Loan program. Customer service is a bit better during the loan origination process in the Direct Loan program, but a bit worse during repayment. However, the US Department of Education has awarded contracts to four of the largest education lenders to service loans in the Direct Loan program.
The SAFRA legislation has no impact on existing student loans or borrowers who have already graduated.
About half of the savings will be used to index the maximum Pell Grant to the inflation rate plus 1%. It would increase to $5,550 in 2010–2011 and likely reach $6,900 by 2019–2020. However, it does not turn the Pell Grant into a true entitlement program. Congress could still cut Pell Grant funding during the annual budget appropriations process as it did in 2008.
The legislation also eliminates all of the asset questions and many of the untaxed income questions on the Free Application for Federal Student Aid (FAFSA), cutting about a page from the six-page form.
This would eliminate any penalty for savings in the federal need analysis formula.
SAFRA includes several provisions relating to student loans. The interest rate on subsidized Stafford loans for undergraduate students will switch to a variable rate capped at 6.8% starting on July 1, 2012. Otherwise the interest rate would have increased from 3.4% to 6.8% on that date, a big jump. Annual funding for the Perkins Loan program would increase four-fold from $1.5 billion to $6.0 billion a year. While the new Perkins loan would no longer have subsidized interest, the interest rate would remain at 5.0%.
Also, students at many more colleges would become eligible for the Perkins loan.
Finally, the bill calls for the new College Access Challenge Grant program which would focus on increasing enrollment, persistence and completion rates. It would fund financial literacy programs and make it easier for students to transfer from 2-year colleges to 4-year colleges. There would also be a significant increase in funding for community colleges and minority institutions.
20090923
Obama takes on Student Loan Lenders
President Obama criticized the largest U.S. banks Monday for trying to thwart legislation that would overhaul federal student loan programs.
He singled out in particular banks that have received bailout money from the federal government, saying they want to maintain the status quo on student loans because they get an "unwarranted subsidy" from it.
The House of Representatives last week approved legislation that would cut major banks and student loan giant Sallie Mae out of a large slice of the $92 billion university student loan business, shifting most lending into a program run by the Education Department.
The bill, strongly backed by Obama, will go next to the Senate for further consideration. Some Republicans criticized the bill as a government takeover of an industry that has served students well but Obama's fellow Democrats praised the House bill as a victory for students over banks.
"Ending this unwarranted subsidy for the big banks is a no-brainer for folks everywhere. Everywhere except Washington, that is," Obama said in remarks prepared for delivery at a community college in Troy, N.Y. "In fact, we're already seeing the special interests rallying to save this giveaway.
"The large banks — many who have benefited from taxpayer bailouts during the financial crisis — are lobbying to keep this easy money flowing. This is exactly the kind of special interest effort that has succeeded before and that we cannot allow to succeed again," he said.
Many U.S. students take on crushing debt loads to pay university bills that can total $50,000 a year or more at the country's private universities.
He singled out in particular banks that have received bailout money from the federal government, saying they want to maintain the status quo on student loans because they get an "unwarranted subsidy" from it.
The House of Representatives last week approved legislation that would cut major banks and student loan giant Sallie Mae out of a large slice of the $92 billion university student loan business, shifting most lending into a program run by the Education Department.
The bill, strongly backed by Obama, will go next to the Senate for further consideration. Some Republicans criticized the bill as a government takeover of an industry that has served students well but Obama's fellow Democrats praised the House bill as a victory for students over banks.
"Ending this unwarranted subsidy for the big banks is a no-brainer for folks everywhere. Everywhere except Washington, that is," Obama said in remarks prepared for delivery at a community college in Troy, N.Y. "In fact, we're already seeing the special interests rallying to save this giveaway.
"The large banks — many who have benefited from taxpayer bailouts during the financial crisis — are lobbying to keep this easy money flowing. This is exactly the kind of special interest effort that has succeeded before and that we cannot allow to succeed again," he said.
Many U.S. students take on crushing debt loads to pay university bills that can total $50,000 a year or more at the country's private universities.
Struggling to Pay Student Loans
When money is tight and jobs are scarce, repaying your student loans is painful. But if you let your loans go into default, you'll enter a world of hurt.
Defaults on federal student loans rose to 6.7% last year from 5.2% a year earlier, the highest default rate since 1998.
In general, if you fail to make payments on a federal student loan for nine months, the loan will be considered in default. Your loans will probably be turned over to a collection agency, and your credit report will be trashed. Unlike private lenders, the federal government can garnish your wages without going to court, says Margaret Reiter, an attorney and co-author of Solve Your Money Troubles. There's no statute of limitations on collection of federal student loans, Reiter adds, which means the government can go after you for the rest of your life.
Filing for bankruptcy probably won't solve your problem. Under federal bankruptcy laws, it's not enough to show that you can't afford to repay your loans now. You must also convince the bankruptcy court that you'll be unable to repay them in the future. This standard is extremely difficult to meet, Reiter says.
Fortunately, there are steps you can take to avoid default, even if you can't afford your payments. Options include:
• Deferment. This option is available for borrowers who are still in school, unemployed or experiencing other types of economic hardship. Payments are typically deferred for up to three years.
If you have subsidized federal student loans, which are provided to borrowers who demonstrate financial need, the government will pay the interest during deferment. If you have unsubsidized Stafford loans, interest will accrue during the deferment period. Deferment is not automatic. You must apply for it through your lender.
• Forbearance. In this case, your lender will allow you to postpone payments, or pay a smaller amount, for up to three years. Forbearance is granted at the discretion of the lender, and the requirements are generally less stringent than those for deferment, says Robert Murray, spokesman for USA Funds, a company that guarantees student loans.
Interest will continue to accrue during forbearance, so it's important to resume payments as soon as you're able, Murray says. Otherwise, you could end up with a much larger balance.
• Income-based repayment. This new program allows borrowers with federal student loans to have their payments capped, based on their income. Most borrowers who qualify for the program will never have to spend more than 10% of their income on student loan payments. Those whose income falls below 150% of the poverty level won't have to make any payments.
Deferment or forbearance will help you put your loans on hold during a short-term crisis, such as temporary unemployment, says Lauren Asher, acting president for the Project on Student Debt. But if you're facing long-term financial difficulties, income-based repayment is the better choice, she says.
To apply for income-based repayment, contact the lender that is servicing your student loan. You can learn more about the program at www.ibrinfo.org.
Borrowers who are having trouble repaying private student loans have fewer options. The rules governing repayment of these loans are determined by the loan contracts, not federal law. That means private-loan borrowers "are really at the mercy of lenders," says Deanne Loonin, staff attorney for the National Consumer Law Center.
Your loan may be declared in default after you miss just one payment, depending on the terms of your loan contract. Private lenders aren't required to allow borrowers who are unemployed to defer payments. Your lender may grant you forbearance, but the period depends on the terms of the contract, Loonin says.
Private lenders don't have as many collection tools as the federal government, but they can still make your life pretty miserable. They can turn your account over to a collection agency and add the fees to your balance. They can sue to have your wages garnished. And private student loans are identical to federal loans in one critical respect: They're nearly impossible to discharge in bankruptcy.
Defaults on federal student loans rose to 6.7% last year from 5.2% a year earlier, the highest default rate since 1998.
In general, if you fail to make payments on a federal student loan for nine months, the loan will be considered in default. Your loans will probably be turned over to a collection agency, and your credit report will be trashed. Unlike private lenders, the federal government can garnish your wages without going to court, says Margaret Reiter, an attorney and co-author of Solve Your Money Troubles. There's no statute of limitations on collection of federal student loans, Reiter adds, which means the government can go after you for the rest of your life.
Filing for bankruptcy probably won't solve your problem. Under federal bankruptcy laws, it's not enough to show that you can't afford to repay your loans now. You must also convince the bankruptcy court that you'll be unable to repay them in the future. This standard is extremely difficult to meet, Reiter says.
Fortunately, there are steps you can take to avoid default, even if you can't afford your payments. Options include:
• Deferment. This option is available for borrowers who are still in school, unemployed or experiencing other types of economic hardship. Payments are typically deferred for up to three years.
If you have subsidized federal student loans, which are provided to borrowers who demonstrate financial need, the government will pay the interest during deferment. If you have unsubsidized Stafford loans, interest will accrue during the deferment period. Deferment is not automatic. You must apply for it through your lender.
• Forbearance. In this case, your lender will allow you to postpone payments, or pay a smaller amount, for up to three years. Forbearance is granted at the discretion of the lender, and the requirements are generally less stringent than those for deferment, says Robert Murray, spokesman for USA Funds, a company that guarantees student loans.
Interest will continue to accrue during forbearance, so it's important to resume payments as soon as you're able, Murray says. Otherwise, you could end up with a much larger balance.
• Income-based repayment. This new program allows borrowers with federal student loans to have their payments capped, based on their income. Most borrowers who qualify for the program will never have to spend more than 10% of their income on student loan payments. Those whose income falls below 150% of the poverty level won't have to make any payments.
Deferment or forbearance will help you put your loans on hold during a short-term crisis, such as temporary unemployment, says Lauren Asher, acting president for the Project on Student Debt. But if you're facing long-term financial difficulties, income-based repayment is the better choice, she says.
To apply for income-based repayment, contact the lender that is servicing your student loan. You can learn more about the program at www.ibrinfo.org.
Borrowers who are having trouble repaying private student loans have fewer options. The rules governing repayment of these loans are determined by the loan contracts, not federal law. That means private-loan borrowers "are really at the mercy of lenders," says Deanne Loonin, staff attorney for the National Consumer Law Center.
Your loan may be declared in default after you miss just one payment, depending on the terms of your loan contract. Private lenders aren't required to allow borrowers who are unemployed to defer payments. Your lender may grant you forbearance, but the period depends on the terms of the contract, Loonin says.
Private lenders don't have as many collection tools as the federal government, but they can still make your life pretty miserable. They can turn your account over to a collection agency and add the fees to your balance. They can sue to have your wages garnished. And private student loans are identical to federal loans in one critical respect: They're nearly impossible to discharge in bankruptcy.
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