With the economy making a slow trudge back from the brink, many are considering going back to school. Student loans are the only viable option for many potential college students, but that means incurring extra long-term debt at the worst possible time. A lot of language about reform has been batted around at all levels of government this past year. What has changed, what are politicians promising, and what policies are on the way?

Pay as You Earn

President Barack Obama announced in October 2011 that he would be making some major changes to the federal student loan program. Introducing the “Pay As You Earn” proposal, he promised smaller monthly payments for over 1.6 million students.

It won’t take effect until 2014, but you will then be able to ensure your student loan payments are no more than 10% of your income. If you make payments for 20 years, your balance may then be forgiven. The current Income-Based Repayment Plan (IBR) only allows your payments to be reduced to 15% of your income, with balance forgiveness after 25 years. Visit this link to find out if you are eligible.

President Obama announced recently that he intends to spur this to 2012 for students who are already struggling with payments. If you are employed in public services, such as nursing or teaching, you may get balance forgiveness in as soon as 10 years.

Bear in mind that none of this affects students who got loans for school from private lenders.

Loan Consolidation

Because of multiple payments for different loans, there has historically been a high default rate, as juggling multiple loans gets tricky. Beginning January 2012, 6 million more students were able to consolidate all their loans so that interest rates are more affordable.

It is not advised to do a loan consolidation with a credit card. If you can pay off a short term loan, check out financial tips from Plain Green Loans. Taking advantage of the consolidation earns you a 0.5% reduction of your interest rate.

Better Informed

As part of these reforms, the Consumer Financial Protection Bureau and the Department of Education have partnered up to offer the “Know Before You Owe” project. This is a form that endeavors to help potential students better understand what type of aid they qualify for, how much they may receive, and how to compare the different financial aid and work study options offered by various colleges. They believe that a lot of students sign for loans each year or each quarter without really understanding the repercussions for default or even how much they may end up owing, much less what other options exist.

If you are interested in seeing what a form looks like and helping the organizations with the project by providing feedback, please visit: http://www.consumerfinance.gov/students/knowbeforeyouowe/

Interest

One thing that isn’t very clear in any of President Obama’s speeches is that subsidized loans are slowly disappearing. The government (beginning July 1st, 2012) will no longer subsidize the interest for graduate student loans and interest will also start accruing for undergraduate subsidized loans during the 6 month grace period after graduation.

In addition, it is probably important to mention that the interest rate on subsidized student loans is doubling from 3.4% to 6.8% this coming academic year.

Startup Encouragement

The Small Business Administration (SBA) hopes to help young entrepreneurs by offering the Student Startup Plan. While the current administration says it wants to support and grow new startups, the SBA is backing it up by promoting the IBR as part of their startup planning for recent graduates. The ideology is that student loan payments should not stand in the way of anyone starting a business.

Graduate and Professional Students

Meanwhile, the Budget Control Act (BCA) became law in August 2011. This law makes it so that graduate and professional students can no longer get Stafford Loans. While the total annual loan amount allowed ($20,500) has not changed, the cap has traditionally been only for unsubsidized loans. Now that there are not subsidized loans, this means you may borrow the same amount, but now you pay much more in interest.

Other things that changed with the BCA include disallowing the Department of Education from offering repayment incentives such as interest reductions or rebates to encourage on-time payments, though they are still allowed to offer rate reductions if you are a Direct Loan borrower who has opted to have your payments automatically withdrawn from your bank account.

Private Borrowers

If you were a private borrower, Tennessee Rep. Steve Cohen and other Democrat Congress members are working for some relief for you, too. Since 2005, thanks to the Bankruptcy Reform Bill, you could not declare your privately held student loans in a bankruptcy. He is looking to reverse that, likening it to credit card debt. He is facing major opposition from his Republican counterparts, however.

Demand for Bigger Reform

Tuition will continue to climb as long as enrollment is up – and it is. The Occupy Wall Street movement has spawned Occupy Student Debt – asking for 0% interest on student loans, total and immediate debt forgiveness for prior students, and a future of free public college. While the solvency of these demands is debatable, politicians are listening. They have to. These future students are current voters.

Today’s guest article was provided by Christina Jones who is a Blogger Outreach Specialist with Blue Glass Interactive

Sources:

[1] http://www.whitehouse.gov/the-press-office/2011/10/25/we-cant-wait-obama-administration-lower-student-loan-payments-millions-b

[2] http://www.finaid.org/loans/forgiveness.phtml

[3] http://www.secureloanconsolidation.com/blog/changes-in-2012-for-holders-of-student-loan-debt/

[4] http://www.whitehouse.gov/economy/business/startup-america

[5] http://www.sba.gov/startupamerica/student-startup-plan

[6] http://www.loyno.edu/financialaid/federal-student-loan-changes-2012-2013

[7] http://www.cbsnews.com/8301-503544_162-20126172-503544/who-will-benefit-from-obamas-student-loan-plan/

[8] http://www.occupystudentdebtcampaign.org/our-principles/