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President Obama's Student Loan Reform Proposal

Date:  October 28, 2011

President Obama proposed a new Special Direct Consolidation Loan Program and proposed changes to the Income Based Repayment (IBR) option for federal loans.   There are many unresolved issues with these proposals, including whether they can be done by executive order, whether there is a cost to taxpayers and whether the changes in regulations are subject to the federal master calendar provisions and Department of Education "Negotiated Rulemaking".  These continue to be unresolved and there is so much press on these issues, not all of it accurate.
 
The currently available information on the Special Direct Consolidation Loan can be found at http://studentaid.ed.gov/PORTALSWebApp/students/english/specialconsolidation.jsp.   This new Special Direct Consolidation Loan will be available from January through June 30, 2012, and the Department of Education will begin contacting eligible borrowers in January.  As we understand it, to be eligible for this special consolidation loan, a borrower must have

  • At least one direct Loan or FFEL Loan held by the Department of Education  and
  • One commercially-held FFEL loan. 

The commercially held FFEL loans can be subsidized, unsubsidized, PLUS and consolidation loans that are in grace, repayment, deferment or forbearance.  Defaulted loans and loans subject to a bankruptcy proceeding are ineligible, as well as private loans, despite some press coverage to the contrary.

Currently, the interest rate on a Federal Direct Consolidation Loans is rounded up to the nearest 1/8 of a percentage point.  It is unclear at this point how the interest rate on this new Special Direct Consolidation Loan will be calculated.  Be assured though that you will receive a 0.25% interest rate reduction from the current interest rate on your commercially-held FFEL loans.  Current and special consolidation loans that are paid by automatic debit also will be subject to a 0.25% interest rate reduction.

As is the case in the current Federal Direct Loan Consolidation Program, you will lose any repayment incentives that you currently have or you may qualify for in the future, if you consolidate in this Special Consolidation Loan program.

The President has also proposed a “Pay as you Earn” program changing the current IBR program.  The percentage of income above 150% of the poverty level required to pay student loans will decrease to 10% (from the current 15%) and the number of years after which the outstanding balance would be forgiven would be reduced from 25 to 20 years (except for those who qualify for the Federal Public Service Loan Forgiveness Program).  This new program may begin in January 2012, but will not be available to students who graduated in 2011 or earlier. The White House Press Release is here at http://www.whitehouse.gov/the-press-office/2011/10/25/we-cant-wait-obama-administration-lower-student-loan-payments-millions-b

We will keep you informed as we hear more!

Sincerely,

Law School Financial Aid Office