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Understanding Obama’s New Student Loan Plan

August 15, 2014

by Suada Kolovic

With the final month of summer rapidly slipping away, now is the time to buckle down and finalize how you're going to fund your college education. Whether that entails a full-ride scholarship (way to go!), an impressive financial aid package or even necessary loans, it's important to understand your options. Some of you might even be considering President Obama's Pay As You Earn Repayment Plan...if you can figure out what it involves or if it's even an option. If you're confused about this plan, you're in luck: U.S. News and World Report has broken down the big questions you need answered below:

  • Will these updates help me? If you have federal student loans, maybe. Starting in 2015, borrowers who took out loans before October 2007 or stopped borrowing by October 2011 will be eligible to take advantage of the Pay As You Earn Repayment Plan. Government officials estimate this includes an additional five million people.
  • How much could I save? Now, most federal loan borrowers are eligible for income-based repayment – a different repayment plan that has the same premise as Pay As You Earn. Unlike Pay As You Earn, however, IBR caps payments at 15 percent of one's disposable income and forgives the balance after 25 years of payments. Those differences could mean a lot, both in monthly payment amount and in the total amount paid over time.
  • Didn't the president mention loan refinancing too? He did, but in relation to a bill that Massachusetts Senator Elizabeth Warren introduced last month called the Bank on Students Emergency Loan Refinancing Act. This legislation would allow federal and private student loan borrowers with older, higher interest loans to consolidate them within the direct loan program at today's lower fixed interest rates. That bill still has to pass both the Senate and the House, something that may not happen because Republicans are opposed to paying for the bill with a gradual increase in tax rates for those in the higher income brackets.
  • What else should I know? There is still a long way to go before the president's executive action takes effect: December 2015 is the target implementation date. The overall plan includes quite a few other ideas that will make a difference to student loan borrowers, like improving financial incentives for federal student loan servicers to help borrowers stay out of default, making it easier for active-duty military to receive benefits and increasing communication partnerships with entities such as the IRS and tax companies to ensure consumers are aware of their higher education rights and benefits.

What do you think of the president's attempt to ease the financial burden associated with student loans? Let us know your thoughts in the comments section. And for more information on federal funding, visit our Financial Aid section.

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