NAICU Washington Update

Some Relief for Some Borrowers: But Don't Call Us, We'll Call You

November 07, 2011

With great fanfare on October 26, President Obama announced both a plan to reduce the cost of repaying some federal student loans for some borrowers, and a proposal for a model student aid award form to be used by all colleges.

The loan plan is complex and likely to generate a great deal of confusion for many students.  Part of the confusion stems from the fact that Obama is using obscure administrative authority to try and enact a portion of a more generous plan proposed in his 2012 budget to Congress, which was never approved.

It's estimated that as many as 7 million of the federal student loan program's 36 million borrowers could benefit from the proposal.  However, the convoluted path borrowers must take to get the benefit makes it likely than many fewer students will actually qualify.  Essentially, there are two ways that qualifying borrowers can take advantage of the President's proposed reduction in loan payments.

Special Consolidation:  The consolidation program would enable borrowers with at least one FFELP (bank-held) loan and one loan owned by the Department (a Direct Loan or a FFELP loan owned by the Department) to combine the two loans into a single Direct Loan.. The interest rate on the FFELP portion of the consolidated loan would be reduced by 0.25 percent. An additional .25 percent on the consolidated amount would be discounted if the borrower opted for automatic payment.

However, the benefits for borrowers are relatively modest  Besides the lowered interest rate and simplification of a single payment, the conversion to a Direct Loan makes former FFELP borrowers eligible for public service loan forgiveness, and the repayment period does not start over again, as it does with current consolidated loans.

The window for consolidation is January 1 through June 30, 2012.  The Department will notify borrowers - perhaps as many as 6 million - in early January if they are eligible for the program. Consolidations prior to notification won't receive the consolidation benefit.  More details on consolidation are available on the Department website.

Pay as You Earn:  This proposal is available to current college students - but only if they have taken out a federal loan in 2008 or later, and then take out another loan in 2012 or later. It is basically a way to take earlier advantage of benefits in the income based repayment (IBR) system that were recently enacted and scheduled to go into effect for new loans July 2014.

The change would reduce the maximum payment required from 15 percent of a borrower's discretionary income to 10 percent. It also would shorten the length of time for forgiveness of an income-based loan from 25 to 20 years. Borrowers income must be insufficient to afford standard repayment to qualify for income-based repayment.

This proposal is subject to negotiated rule-making set to begin in January.  For details on what other loan issues will be covered in the negotiations, and how to apply, see the October 28, 2011, Federal Register

The administration is hoping that publicity of the proposals also will encourage more borrowers to take advantage of the current IBR program. (It's estimated that less than a half million borrowers now are using it.).

Some politicians and policy makers have criticized the president's loan proposal, especially for the consolidation feature's limited applicability (6 million of 36 million borrowers ), and its minimal reduction to average monthly payments (estimated at less than $10).  Others have warned borrowers to make sure they don't lose existing benefits in the process.  Even the administration seems concerned that the media attention around the president's announcement could lead students to consolidate before the January window officially opens, causing them to lose out on the proposed benefits.

Know Before You Owe:  President Obama also announced a joint effort of the new Consumer Financial Protection Bureau (CFPB) and the Department of Education to develop a model financial aid form for all colleges to consider using when notifying students of their annual student aid award.

The draft form is the result of an effort resulting from the 2008 Higher Education Act reauthorization to make it easier for students to compare awards from competing schools. A public meeting on the subject was held on September 23.  As proposed, the draft form provides both individual award information from the particular school as well as national average cost information by sector. The CFPB is seeking comments on its controversial proposal.  Please also send a copy of your comments to NAICU (

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