Obama Lends Loan Relief To Current Students

With high tuition costs and dim job prospects, college students are increasingly struggling to make good on their loan debts. The White House recently announced changes that would make monthly payments less burdensome. Guest host Allison Keyes learns more from Mark Kantrowitz of FinAid.org and FastWeb.com.

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ALLISON KEYES, host: But first, we wanted to turn to a story that's been getting a lot of attention on the news lately: student loan debt. President Obama announced last week that he was moving forward with changes to federal policies to make it easier for students to afford and pay back federal college loans. But we wondered whether that could help grads like Erica Woods Tucker of Raleigh, North Carolina. She recently left this comment on our Facebook page about the struggle to pay back her loans:

ERICA WOODS TUCKER: I currently owe $40,000 in student loans. I defer them because I don't make enough money to pay them. I'll probably be paying them into my 80s. My husband is laid off and his loan went into default. The loan company refused to reduce the loan payment or defer it. It's $350 a month. He brings home less than half of what he did when he was working. We have three kids and the loan payment is more than what we pay for my youngest daughter to go to Pre-K. We want to pay the loan, but it'd be nice to have some help from someone.

KEYES: Erica's just one of the millions of Americans with college debt and depending on who you ask, the total outstanding student loan debt in America is somewhere between a half trillion and one trillion dollars.

To find out how President Obama's plan might affect that, I'm joined by Mark Kantrowitz. He's the publisher of FastWeb.com and FinAid.org. Thanks, Mark, for being with us today.

MARK KANTROWITZ: Thank you for having me.

KEYES: Mark, talk to us about exactly what changes President Obama has planned for the policy.

KANTROWITZ: Yeah. There are two main changes. One has to do with a safety net program called income-based repayment. Income-based repayment bases your monthly payment on a percentage of your discretionary income as opposed to the amount you owe. The current income-based repayment plan that uses a percentage as 15 percent with any remaining debt forgiven after 25 years from repayment.

Congress passed a change that would go into effect on July 1, 2014 that would reduce the monthly payment by a third, from 15 percent to 10 percent, and push up the forgiveness from 25 years to 20 years. President Obama is pushing this change forward by two years so that it'll be available to students who borrow loans next year.

KEYES: And this is only about federal loans, right? Not private?

KANTROWITZ: This is just federal loans, not private. One of the advantages of federal education loans is that they are available for income-based repayment and also an add-on program called public service loan forgiveness. Just the student loans, not parent loans and not private student loans.

KEYES: So who exactly is going to be helped by these policies?

KANTROWITZ: It's a little complicated. You can't have any student loan debt from before 2008, so as of January 1, 2008, you have to have been a new borrower and you also have to take out at least one loan in 2012 or a later year and this helps students who are currently in school and who are taking on more loans next year, not students who have already graduated.

KEYES: What if your loan is already in default? Does this help you?

KANTROWITZ: It does not. It's not available to borrowers who are in default unless they rehabilitate their loans, which you can do by making nine out of ten consecutive full, voluntary, on-time monthly payments, in which case, they would be able to get income-based repayment. But someone already in default who doesn't rehabilitate their loans can't get income-based repayment.

KEYES: How much will this save people that are able to take advantage of this program, real time? I mean, are we talking just a reduction in monthly loan payments?

KANTROWITZ: We're talking about a reduction in monthly loan payments that cuts the payments by a third and...

KEYES: So that's like a couple of hundred dollars, maybe, in some cases?

KANTROWITZ: In some cases, it could be hundreds and maybe even as much as $1,000, but it makes the monthly payments affordable. Under the new income-based repayment plan, the typical borrower will see monthly payments that are six or seven percent or less of their gross monthly income.

KEYES: If you're just joining us, you're listening to TELL ME MORE from NPR News. I'm Allison Keyes. We're talking about student loan debt and President Obama's plan for providing grads with some relief. Our guest is Mark Kantrowitz of FinAid.org.

You have concluded that the total amount of student loan debt is about a trillion dollars. How'd you get there and how significant is that?

KANTROWITZ: My trillion dollar figure for both federal and private education debt is based on the federal budget, looking at two successive snapshots of total student loan debt outstanding and projecting it forward and a repayment trajectory model for private student loans. And this model has worked quite well. It's within a few tens of billions of dollars of the actual figure.

The U.S. Department of Education recently noted that total federal education loan debt outstanding as of the end of September 2011 was at $848 billion.

KEYES: Wow.

KANTROWITZ: And add on somewhere between $120 and $160 billion of private student loan debt outstanding and the total is very close to a trillion dollars, if not perhaps over it.

KEYES: Mark, how much of a difference will the president's plan make here? Will it help prevent defaults on student loans or do you think it'll lead students to borrow more?

KANTROWITZ: Income-based repayment is a safety net. If you're living under 150 percent of the poverty line, your monthly payment under income-based repayment is actually zero. So there's never really any reason why someone should default on their federal education loans, given that they have the availability of something like income-based repayment. It makes the monthly payments more affordable.

KEYES: If so many people are, despite that, having trouble repaying their loans, should the government be doing something to make getting them harder in the first place?

KANTROWITZ: It's more about providing better options for financial relief. Perhaps allowing people to discharge these loans in bankruptcy if they have an issue that's going to persist for most of the life of the loans.

KEYES: What might another option be?

KANTROWITZ: Well, if you have a temporary financial difficulty, there are also deferments and forbearances on the federal education loans, which are temporary suspensions of the obligation to repay. You still owe the money and, in some cases, the interest will continue to accrue, so you shouldn't persist on a deferment or forbearance for very long because you're just digging yourself into a deeper hole. But if you have medical leave or maternity leave or you just lost your job and expect to get a new job in a few months, a temporary suspension of the monthly payments can be a useful way of dealing with it.

If it's a more long term financial difficulty, you need an alternate repayment plan, like income-based repayment, and there are a few other plans; extended repayment, graduated repayment. All of these reduce the monthly payment by stretching out the term of the loan, which ultimately means you'll pay more in interest over the life of the loan than if you had stuck with standard 10 year repayment. But in many cases, borrowers who need these plans have no real other option but to choose one of these plans.

KEYES: Mark Kantrowitz is a publisher of FastWeb.com and FinAid.org. He joined us from WQED in Pittsburgh. Thanks, Mark, for joining us.

KANTROWITZ: Thank you for having me.

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