With rates on new subsidized student loans set to double in two weeks, the focus is again on the nation’s crippling $1 Trn in total student loan debt. That trillion in student loans is now a larger amount than our country owes on credit cards. This has been especially problematic for our generation, as we’ve struggled through under and un-employment post-recession, finding it difficult to repay the increasingly onerous student loan burden.
But some upcoming changes and recent proposals may significantly alter student loan affordability and re-payment schemes, so read on to learn how you may be impacted:
Market-Based Interest Rates
One of the biggest criticisms of student loan interest rates (aside from the obscenely high over 8% rates charged on some federal student loans) is that they’re fixed, and as such, don’t reflect market fundamentals. This is an issue because student loan borrowers are paying nearly twice the prevailing market rates for other types of loans (such as mortages) at the moment. If student loan rates were variable, they’d more closely reflect underlying economic fundamentals and not unduly harm borrowers.
Now, there’s serious debate in the Senate regarding precisely that – tying interest rates to the 10-year Treasury note, for example. This could mean any new federal educational loans you take out would feature a variable (and potentially more favorable) rate. Keep tuned to developments on this front; a decision could emerge within the next week.
Private Student Loan Lenders Ease Up
It used to be that while borrowers of federal loans could fairly easily receive forbearance, deferments, or other payment-reducing assistance during economic hardship, borrowers from private lenders were often out of luck. After thousands of emails and phone calls from frustrated borrowers to the lenders and Congressional leaders, it seems some private student loans may now offer a few concessions.
Sallie Mae, for example, will allow borrowers to apply for a one-year interest-only payment period, while Discover Student Loans will stop charging new borrowers a penalty for late payments. These may be small changes, but they’re worth being aware of if you’re experiencing repayment difficulty.
PAYE vs. IBR
Though it’s just Congressional talk at the moment, discussion has been heating up over whether to retro-actively extend PAYE to all eligible borrowers. Currently, students with loans dated before October 1, 2007 only qualify for the government’s IBR plan, which requires you to pay 15% of monthly disposable income toward student loans and grants forgiveness after 25 years of regular payments. The more generous PAYE program caps monthly payments at 10% of disposable monthly income and grants forgiveness after 20 years. The difference between the two programs can amount to tens of thousands of dollars in interest payments, in some cases, so it’s worth keeping an eye on.