Repayment options grow for student loan borrowers
By Lisa Bertagnoli
|COMPARE STUDENT LOAN REPAYMENT PLANS|
|Pay As You Earn||Income-Based Repayment||Standard Repayment|
|Eligible loans||Direct Subsidized and Unsubsidized Loans; Direct PLUS Loans made to graduate or professional students; Direct Consolidation Loans that don't contain PLUS loans made to parents
||Direct Subsidized and Unsubsidized Loans; Direct PLUS Loans made to graduate or professional students; Direct Consolidation Loans free of PLUS loans made to parents; Subsidized and Unsubsidized Federal Stafford Loans; FFEL Plus Loans made to graduate or professional students; FFEL and Consolidation Loans without underlying PLUS loans made to parents
||Direct Subsidized, Unsubsidized and PLUS Loans; Direct Consolidation loans, Subsidized and Unsubsidized Federal Stafford Loans; FFEL Plus and Consolidation Loans
|Time restrictions||At least one loan disbursed on or after Oct. 1, 2011; none before Oct. 1, 2007
|Monthly payment cap||10 percent of discretionary income
||15 percent of discretionary income
||Fixed monthly payment; minimum $50
|Repayment span||20 years
|Monthly payment for a $30,000 debt, based on 6.8% interest||$194 for a single person making $40,000 a year
||$291 for a single person making $40,000 a year
Autopay is optional --
To further sweeten both deals, the government reduces the loan interest rate by one-quarter of a percent for payments made via auto debit. "It's not required, but it's a good idea," Kantrowitz says.
So good, in fact, that U.S. Rep. Tom Petri is looking to make it a law. The Wisconsin Republican's Earnings Contingent Education Loans Act, introduced to the House of Representatives in December 2012, proposes a system in which employers withhold student loan payments from a borrower's paycheck, just as they do with federal and state income taxes. Deductions could not exceed 15 percent of wages.
The legislation would tie the loan interest rate to Treasury market rates, and cap total interest payments at half of the loan balance on graduation. For instance, a student who borrowed $30,000 would pay no more than $15,000 in interest.
But to pay for the interest rate cap, the legislation proposes eliminating some student-loan subsidies that help low-income borrowers -- a provision likely to rile Democrats. The bill died when the 112th Congress adjourned in January 2013; Petri's press office says he plans to reintroduce it.
The bill's aim is not just to make things easier for some borrowers. Petri argues it would boost loan repayments and cut the default rate. An FAQ document from his office indicates that in the United Kingdom, which has a similar plan, 98 percent of student-loan borrowers repay their debt. In contrast, in the United States, 13.4 percent of borrowers default on their loans within three years of graduating.
Default is a huge issue with student loans, and it is difficult if not impossible to get a federal loan discharged via bankruptcy. To do so, borrowers must prove that they cannot maintain a "minimal standard of living" if they continue to pay off the loan, according to the Student Loan Borrower Assistance Project, an arm of the National Consumer Law Center. "It's extremely difficult to get student loan forgiven," says Deanne Loonin, a Boston-based attorney and director of the organization.
The Fairness for Struggling Students Act of 2013 would extend bankruptcy rights for private student loans. That would be good news, except that private loans account for only an estimated 7 percent of student debt. And the bill is expected to face considerable opposition.
"There is momentum building, even in the lending industry, to come out in favor of some bankruptcy rights, but there's nothing concrete yet," Loonin says.