U.S. President Barack Obama on Oct. 26 announced changes to federal student loan programs that seek to facilitate student loan repayment.
Speaking to an audience at the University of Colorado Denver, Obama outlined his "Pay As You Earn" proposal, which will allow students with student loans from income−based repayment (IBR) plans to cap their student loan payments at 10 percent of their discretionary income as early as 2012.
The IBR plan caps monthly payments for certain federal student loans based on income and family size.
"These proposals from the Obama administration are opportunities for students to manage their repayment," Martha Savery, director of Community Outreach for Massachusetts Educational Financing Authority (MEFA), told the Daily.
The proposal expedites an existing measure enacted by Congress to improve the IBR plan and reduce monthly payments caps from 15 percent of discretionary income to 10 percent on July 1, 2014. Prior legislation passed by Congress had capped loan repayment plans at 15 percent of graduates' discretionary spending.
There are currently an estimated 1.6 million student borrowers who could be able to cap their loan repayments at 10 percent as a result of "Pay As You Earn."
Patricia Reilly, director of financial aid and co−manager of Student Financial Services at Tufts, explained that Obama's proposal would impact students after graduation.
"The changes in the student loan programs will impact students at the point that they begin repaying their loans, typically six months after they graduate," she said in an email. "These change[s] will allow students with lower earning to lower their monthly payments and make their payments more manageable."
The proposal also addresses debt forgiveness, stating that borrowers who make payments for 20 years can apply to have their debts forgiven, as well as those employed in public service occupations, who would become eligible for forgiveness after 10 years of loan repayments.
"Because many Tufts students pursue careers in the lower paying public service sector, these changes may be of benefit to some of our graduates," Reilly said.
The proposal also calls for the consolidation of loans from the Federal Family Education Loans (FFEL) program into the Direct Loans program. There is currently $400 billion in outstanding debt owed to the FFEL program.
FFELs typically have higher interest rates than Direct Loans, and must be paid separately under the current program.
"I remember writing like five different checks to five different loan agencies — and if you lost one that month, you couldn't get all the bills together, you missed a payment, and then suddenly you were paying a penalty. We're going to make it easier for you to have one payment a month at a better interest rate," Obama said in the Oct. 26 address.
Borrowers who opt to consolidate FFEL loans with the Direct Loan program will also receive a 0.5 percent reduction on their interest rate on some of their loans.
Obama also referenced the current "Know Before You Owe" project, run by the Consumer Financial Protection Bureau and Department of Education, which aims to ensure that students fully understand their loan packages and the debt repayment plans before accepting loan packages.
"‘Know Before You Owe' — so you have all the information you need to make your own decisions about how to pay for college," Obama said in his speech.
Savery emphasized the need for students to understand the terms of student loans.
"For us at MEFA, we'd love a real understanding about debt to begin so much earlier," she said. "One of the things we always want students to do is be great consumers, educated consumers, and understand how much it is that they're borrowing. If there are programs to help offset what debt students have incurred, that's great."
Sophomore Camila Ibagon is encouraged by Obama's proposal. "In this financial situation, it's great that he's giving students a break," she said.
Senior Asad Badruddin agreed contingent on no additional interest being tacked onto the loans.
"It's good in the sense that it gives people some relief," Asad Badruddin added. "If there's no interest, then it's a good idea."
But Badruddin also expressed some hesitancy at slowing the debt repayment process.
"On the other hand, I'd say that you should encourage people to pay off their debts as [quickly] as possible," he said. "A big problem in America is that people have too much debt."
Reilly noted that Tufts graduates have been "very successful" in the repayment of student loans. "The cohort default rate at Tufts, which is the percentage of students who default on their student loans, is 1.1 [percent] for the most recent year," she said. "As a comparison, the national average cohort default rate is 8.8 [percent]."
