The Obama administration has announced two initiatives to lower student loan payments for some borrowers. One, an update to the existing income-based repayment program, will cap loan payments at 10% of discretionary income for certain borrowers. The other proposal will let some borrowers merge older student loans with newer ones.
The current income-based repayment program caps loan payments at 15% of discretionary income for borrowers who meet certain income and debt criteria. A law passed in 2010 will lower that to 10% for new borrowers starting in 2014.
Under the administration’s plan, borrowers whose first federal student loan is from 2008 or later, and who also have at least one loan from 2012 or later, will be able to apply for income-based repayment plans with a 10% cap beginning in 2012. According to the administration, the lower cap could reduce payments for more than 1.6 million borrowers.
The plan will also allow some borrowers who’ve made regular payments to be eligible for loan forgiveness on the balance of their debt after 20 years; currently, debt forgiveness kicks in after 25 years.
The White House’s loan consolidation plan will allow some borrowers who have both newer Direct Loans and older Federal Family Education Loans to consolidate the loans into a single Direct Loan, with an interest rate reduction of up to 0.5%. The administration estimates that 6 million borrowers will be eligible for the consolidation program.