New Regulation Caps Student Loan Repayment Amounts

A new executive order could make it easier for many students to pay back their student loans. President Obama has announced the order, which is an expansion of a 2010 program, which is geared toward making repayment easier for students who are struggling with student debt.

Most college students take out student loans to help make things like tuition, books, housing and living expenses easier to handle while going to school. In fact, the White House reports that 71 percent of students working toward a bachelor’s degree will be in debt when they graduate.

With the new order, student loan payments on federal direct loans will now be capped at 10 percent of a borrower’s income, regardless of when they took out the loan. It is expected that this new payment plan will be available by December 2015.

Who Does this Affect?

Due to the 2010 Pay as You Earn (PAYE) program, most borrowers already had the option of making monthly payments that didn’t exceed 10 percent of their income. However, that program wasn’t available to students with older student loans.

This new executive order extends the option of setting up a capped payment plan based on income to students who took out student loans before October 2007 or who stopped taking out loans by October 2011.

According to the White House, this change will affect about 5 million people, making it easier for them to afford student loan payments.

Will my Debt be Forgiven?

The existing regulation stating that any debt a student has remaining after 20 years of payments (or 10 years for people with public service jobs) is still in effect.

Whether a student was already paying off his loans, was using an income-based payment plan, or will take advantage of the new executive order, his debt will be forgiven after he has made payments for 20 years.

What Other Changes are Coming?

The president also announced that the Secretaries of Education and the Treasury will collaborate on new ways to help students manage their debts after they graduate.

The new initiatives include:

• Better incentives for loan contractors to provide better service to students.
• Implementing systems that make it easier for active-duty military to take advantage of special debt-relief programs that were already in effect.
• Working with the private sector to educate students on their debt repayment options.
• Better communications plans to help vulnerable borrowers understand their options.
• Testing programs to assess how effective required loan counseling services are and finding ways to improve them.
• Educating students and their families on education tax benefits.

All of these programs will make the borrowing and repayment programs easier to navigate so students will know their options and be able to manage their debts when they graduate from college.

What Actions can I Take?

Students who have already taken out student loans should talk with their lender to find out what options are available. Some students may already qualify for a repayment plan that is based on how much they earn and that will be capped at 10 percent of their income. Students who have older student loans may qualify for this repayment plan by December 2015.

Students who are enrolling in college now can be confident that their debt will be manageable. When they earn their degree they will be investing in their future and paving the way for financial stability, even if they take out student loans.