Trick or Treat: President Obama's Plan for Cutting Federal Student Loan Payments

Mark Kantrowitz

October 26, 2011

Trick or Treat: President Obama's Plan for Cutting Federal Student Loan Payments

Income-based Repayment

Who: 1.6 million borrowers since 2008 with at least one loan in 2012 or later, generally borrowers whose total federal student loans exceeds their annual income

What: Reduces cap on monthly loan payments by a third, from 15% of discretionary income to 10%, and forgives the remaining debt in 20 years instead of 25

When: Starts in 2012 instead of waiting until 2014

Who Doesn’t Benefit: 36 million borrowers already in repayment, such as recent and older college graduates

Consolidation of Split Borrowers

Who: 5.8 million “split” borrowers who have loans in both the federally-guaranteed and direct student loan programs

What: Provides an interest rate reduction for split borrowers who transfer their federally-guaranteed student loans into the Direct Loan program by consolidating them

How: 0.25% interest rate reduction on the transferred federally-guaranteed student loans, plus a 0.25% interest rate reduction on all federal loans in the direct loan program for repaying the loans through auto-debit

When: Borrowers will be contacted by their services in early 2012 and must consolidate by June 30, 2012

Who Doesn’t Benefit: Borrowers who are already in the Direct Loan program, non-split borrowers who have only federally-guaranteed loans and borrowers who are in default on their federal student loans

Caveat: Borrowers who intend to accelerate repayment of their highest interest rate federal student loans might be better off keeping the loans separate instead of consolidating

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