Student loan proposals tweak existing rules
By ELISA SAND, Staff Reporter
A student loan consolidation option proposed by President Barack Obama in October is only available for a specific segment of borrowers, and another repayment option is subject to the negotiated rulemaking process before it can go into effect.|
Obama proposed two specific options for student loan borrowers in October as a way to ease debt burdens. One option would allow for student loan consolidation and another would set a repayment cap at 10 percent of a borrower's discretionary income with a loan forgiveness option after 20 years of payments.
Dakota State University Financial Aid Director Denise Grayson said the president's 10 percent payment cap set to go into effect in 2012 actually adjusts a rule set to go into place by 2014. That rule sets a 15 percent payment limit and loan forgiveness after 25 years. The President's new proposal would allow for remaining loan balance forgiveness five years earlier.
As for the loan consolidation option, Grayson said, the option proposed by Obama allows for a consolidation of Federal Family Education Loan program (FFEL) lender-based loans for students who have both FFEL and Direct loans and will only be available for the first six months of 2012.
Grayson said students who have all lender-based loans already have the option to consolidate those loans with one lender so they can make one payment each month. This special consolidation option, she said, will impact a specific group of students who were attending school when lender-based loans were phased out and Direct loans were phased in. That change took place July 1, 2010. All loans were Direct loans (federally based) following that date," she said.
The result of the change was a cohort of students who graduated with both Direct loans and lender-based (FFEL) loans.
Students who are eligible for this special consolidation option will be notified directly, she said, and can benefit with a .25 percent interest rate reduction and an additional .25 percent reduction for EFT payments.
Although these new options are being proposed, Grayson said, options have always been available for borrowers who start repaying their student loans. Student loans are typically set up on a 10-year repayment schedule, but extended payment plans are available depending on the amount borrowed. Income based repayment plans are already available along with graduated repayments, which start out low and increase every two years. A forbearance or deferment is also available if a borrower goes back to school, or is placed on active duty in the military. Deferments are also available for up to three years in cases of economic hardship.
"These new programs will help certain students, but not all," Grayson said.
What's needed, she said, is a way to educate students about being smart when it comes to borrowing for school. Not only are students obtaining Direct loans, but some also leave school with private loans as well. None of the President's current proposals address private loans," she said.
In addition to loan options, Grayson said, students should also think about the tuition difference when it comes to deciding where they are attending school. Students should also make sure they are only borrowing what they need and avoid re-taking classes if at all possible.
"Go to class and do the assignments," she said. "Repeating a class doubles the cost."
Students do have an option to drop a class early in the semester and still receive a refund, but if a student withdraws from a course late in the semester, there is no refund.
Grayson also recommends looking into the option of testing out of the 0-level classes and avoiding pre-general education classes if at all possible because those classes will be an added expense and they don't count toward a degree. Students are placed in pre-general education classes based on ACT scores, she said, but placement in those courses can be challenged if a student chooses to take a computerized placement test. Students may also take CLEP (College-Level Examination Program) exams to earn credit for additional courses.
When it comes to loan consolidation, Grayson said, the advantage is having only one payment, which reduces the likelihood of default. This is why it's important to know all the sources of student loan funding.
A federal student loan is considered in default if no payments have been made in 270-360 days. Nationally the default rate sits at 8.8 percent for fiscal year 2009. In South Dakota 6.5 percent of student loans issued are in default. At DSU the current cohort default rate is 5.2 percent or 28 borrowers. This rate is up from 1.8 percent or 8 borrowers the previous year. Grayson said those most at risk of default are students who don't complete their degrees. Once a student loan is considered in default, that borrower becomes ineligible for future federal aid which hinders the person's ability to return to school and complete their degree.
Loans can be brought out of default, she said, but it takes time and can delay a student's enrollment by a semester or more.
©Madison Daily Leader 2013
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