On Oct. 26, President Barack Obama introduced his “Pay As You Earn” proposal at the University of Colorado in Denver. The goal of the plan is to improve the college loan repayment process to make it easier and more affordable for students.
“We’re making changes that will give about 1.6 million students the ability to cap their loan payments at 10 percent of their income starting next year,” Obama said in his student loan savings plan op-ed. “We’re also going to take steps to help you consolidate your loans so that instead of making multiple payments to multiple lenders every month, you only have to make one payment a month at a better interest rate.”
Obama said a fact sheet called “Know Before You Owe” will be given to students to help them make the right loan decision. Still in the works, the Consumer Financial Protection Bureau teamed up with the United States Department of Education to help schools improve the student loan information given to students and their families.
“This looks really cool and I hope they do it,” said Director of UC Davis Financial Aid Kathryn Maloney. “With all the information in one place, students can understand better and make better decisions.”
There are two main repayment plans; the standard repayment plan and the income based repayment (IBR) plan. There are also other repayment plans that are dependent on a student’s financial situation.
“There are several repayment plans for student loans,” Maloney said. “One is called the standard and it’s a 10-year plan based on the amount you owe divided by 10 years. There’s also [the IBR plan] that was introduced in 2009 but not as many people knew about it.”
The current IBR plan allows for loan repayments at 15 percent of a person’s income. Beginning in January 2012, that will change to 10 percent.
“It’s fairly new but wasn’t very publicized,” Maloney said. “We don’t promote it; we just do the loans and don’t deal as much with repayment but we definitely could do more to let people know.”
Another improvement of the plan is consolidation, which does not affect UC Davis students because UC Davis is not a part of the Federal Family Education Loan (FFEL) program. To be eligible for the special direct consolidation loan, a person must have a federal loan and a commercially-held FFEL loan.
“Some schools use banks, some schools used the federal government,” Maloney said. “We use the federal government, but there are students like graduate students or transfers who use both [the banks and federal government] and may need consolidation, although more students don’t need consolidation.”
According to Studentaid.ed.gov, the repayment term is different for the special direct consolidation loan than the traditional direct consolidation loan.
“Each loan that is consolidated retains its original repayment term,” Studentaid.ed.gov said. “As a result, borrowers will pay less interest over the life of the loan than they would under the traditional consolidation program.”
According to Maloney, right now is when people are going into repayment. She said it is a six-month grace period so for those who graduated in June, come December is when they will begin asking for repayment.
Those from the Project on Student Debt said that two-thirds of college seniors graduated with loans in 2010 and carried an average of $25,250 in debt. There is also data released by the U.S. Department of Education that shows an increase in federal student loan default rates.
“The official ‘two-year cohort default rates’ show that 8.8 percent of student loan borrowers who entered repayment in 2009 had defaulted by the end of 2010, up from 7 percent for those entering repayment in 2008,” the U.S. Department of Education stated.
UC Davis has a site called CashCourse that helps with basic budgeting.
“It helps you think more about whether you really need to take out a loan,” Maloney said. “Sometimes you can look at your lifestyle and see if you can make other adjustments, such as getting a roommate or making your own food.”
CLAIRE TAN can be reached at firstname.lastname@example.org.