One thing is quite clear about the changes affecting payment of student loan debt set to take affect in 2012: confusion. Exactly what is going to be different about how student debt is managed and how will it affect you?
Change in Loan Subsidization Status
One of the most frightening changes for most student loan debtors is the news that beginning July 1, 2012, student loans will not be subsidized. What does that mean, exactly? Basically that the cost of future student loans will increase, but past loans won’t be affected. If you already hold student loans, this does not change your scenario. If, however, your children are applying for school loans, their loan money will be even more expensive than yours has been over the long haul if the amount cannot be resolved quickly on a targeted repayment plan.
It is also important to remember that existing subsidized loans remain interest free while the student is in school, or working with some type of deferment. That would be any kind of arrangement that allows a break in the payment schedule. For instance, if you decided to go back to school to earn an advanced degree, interest would be deferred on your existing loans for that period of time.
After July 1, 2012, however, federal student loan money for any level of education will not be subsidized. For the 2012-2013 school year, the maximum amount that can be borrowed with a Federal Stafford Loan is $20,500. Additional funds can be borrowed for qualifying participants from Federal PLUS Loans, but neither they nor the Stafford loans will be subsidized.
More Important Than Ever to Calculate Payments
The plain truth is that student loans are expensive and they are getting more expensive over the total life of the loan. It is important, from the beginning, to get clear projections of required monthly payments, and how much the loan will cost you — including the interest — for the proposed repayment period. The recession in America has made it very apparent that there is no such thing as “easy” credit.
For instance, consider this sobering fact. If you take out loans of $23,000 per year for a six-year education, you walk away with $138,000. To repay that amount with interest in ten years, you would have to shell out $1,000 a month. In this economy, most people find that impossible, and so watch their debt build and build and build.
Steps to Ease Some of the Repayment Burden
Beginning in January 2012, about 6 million student debtors will be able to consolidate their loan debt and negotiate a single, lower interest rate. However, this provision applies only to federal loans. The Obama administration is also proceeding with its “Pay As You Earn” plan. Beginning in 2014, student debtors can reduce their monthly payments to a figure equal to 10 percent of their existing discretionary income. This will, in theory, tie repayment to a more realistic assessment of an individuals ability to pay. As the president’s plan moves forward, it will also include forgiveness of the debt after 20 years.
Currently, the law provides for payments at 15 percent of the debt holder’s discretionary income with loan forgiveness after 25 years. Many critics feel the changes are not sufficient, and the recent “occupy” protests included strong cries for simply erasing student loan debt altogether. While it is extremely unlikely that will ever happen, the lowered payment levels and debt consolidation will help many debtors.
Unfortunately, these changes do not apply to individuals who went to school on private loans from banks and similar financial institutions. They routinely face even higher and often variable interest rates. These people are continuing to fight debt balances that have often reached into the six figures and will in no way be helped by the presidents plan.
Student Loan Debt Remains a Serious Issue
Even with these changes, student loan debt in the United States remains a serious issue, crippling the chances many recent graduates have to make life choices like marrying and starting a family. If they cannot feed themselves and their loan, they certainly cannot feed a spouse and children. This new and youthful debtor class is fighting a total debt amount of somewhere between $898 billion to $1 trillion, figures that even exceed credit card indebtedness in the U.S.
The recent changes, while in theory aimed at easing the student loan burden for the debtors, are also part of the federal government’s move to trim expenses in the face of its own spiraling debts. It’s little wonder that confusion has resulted, and, when looked at carefully, there is no avoiding the fact that the changes are minimal at best when weighed against the enormity of the student loan debt issue in this country.