My Loans Consolidated

Great news may come for millions of students in the US. A plan proposal to cut student loan payments will be made by Obama, according to the White House on Monday. In this plan, Obama will propose:

• to limit monthly payments of federal student loans at 10% of the borrowers income.
• to eliminate monthly payment basis for families that earn less than 150% of the poverty level
• to forgive student loans after 20 years instead of 25 years. For public service workers, loans will still be forgiven after 10 years as in the current plan.

To explain this proposal, let’s take an example of a borrowers family of four. This family’s federal poverty level is $22,050. With the proposed plan, family’s of four who earn 150% of this amount, which is $33,075, would then have to pay nothing on a monthly basis. However, if your family earns more than the federal poverty level, you will be required to make your monthly student loans payment as much as 10% of your income.

Although it looks as if this plan would help families with lower than 150% of poverty level, there is still a catch. They do not have to make any monthly payments, but they are still required to pay the principal and as long as their income stays under 150% the poverty level, the interest charges will continue to grow and eventually, they may end up in much deeper debt than they were in before.

Since July 1, 2009, students who have federal student loans are allowed to apply for income-based repayment plans which limit their monthly payment to 15% of their income as covered here in this post. With the new proposal, Obama tries to lower the limit to 10% of the income. According publisher of FinAid.com, Mark Kantrowitz, the cost the feds is estimated to be a huge amount of money if the new policy is enacted. By “huge” he means something between $1 – 2 billion over 5 years.

However, in the White House’s announcement last Monday, Obama has not revealed how much exactly this proposal would cost and how they will be paid for if enacted. This will be announced on the following Monday with the president’s budget plan. Although it seems that the plan will be a great relief for students, the cost of enacting the plan and how the feds are planning to pay for it will determine eventually if the US is going to drown even farther into deficit while saving their future.

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