Before you begin reading or hearing half-cooked reports about the announcements President Obama made last night, I wanted to give a summary of what was announced and also my thoughts and concerns. Much of what is being announced will not involve you as current medical students, but it may have an impact for those graduating in 2012 and also to those who graduated in 2011 and 2010 who are contemplating loan consolidation or are in the process of completing a consolidation. There are many details that have to be ironed out by the U.S. department of Education before we know fully how this will have an impact for those graduating in 2012 and beyond.
Below is the White House Press Release:
WE CAN’T WAIT: OBAMA ADMINISTRATION TO LOWER STUDENT LOAN PAYMENTS FOR MILLIONS OF BORROWERS
Actions Offer Recent Graduates an Opportunity to Consolidate Loans and Reduce Interest Rates
WASHINGTON, DC – Today, the Obama Administration announced it is taking steps to increase college affordability by making it easier to manage student loan debt. The announcement is part of a series of executive actions to put Americans back to work and strengthen the economy because we can’t wait for Congressional Republicans to act.
The Administration is moving forward with a new “Pay As You Earn” proposal that will reduce monthly payments for more than one and a half million current college students and borrowers. Starting in 2014, borrowers will be able to reduce their monthly student loan payments to 10 percent of their discretionary income. But President Obama realizes that many students need relief sooner than that. The new “Pay As You Earn” proposal will allow about 1.6 million students the ability to cap their loan payments at 10 percent starting next year, and the plan will forgive the balance of their debt after 20 years of payments. Additionally, starting this January an estimated 6 million students and recent college graduates will be able to consolidate their loans and reduce their interest rates.
“In a global economy, putting a college education within reach for every American has never been more important,” President Obama said. “But it’s also never been more expensive. That’s why today we’re taking steps to help nearly 1.6 million Americans lower their monthly student loan payments. Steps like these won’t take the place of the bold action we need from Congress to boost our economy and create jobs, but they will make a difference. And until Congress does act, I will continue to do everything in my power to act on behalf of the American people.”
“College graduates are entering one of the toughest job markets in recent memory, and we have a way to help them save money by consolidating their debt and capping their loan payments. And we can do it at no cost to the taxpayer,” said U.S. Secretary of Education Arne Duncan.
Current law allows borrowers to limit their loan payments to 15 percent of their discretionary income and forgives all remaining debt after 25 years. However, few students know about this option. Students can find out if they are currently eligible for IBR at www.studentaid.ed.gov/ibr. Last year, the President proposed, and Congress enacted, a plan to further ease student loan debt payment by lowering the IBR loan payment to 10 percent of income, and the forgiveness timeline to 20 years. This change is set to go into effect for all new borrowers after 2014—mostly impacting future college students.
Today, the Administration is proposing to offer even more immediate relief to many current college students by giving them the chance to limit loan payments to 10 percent of their discretionary income starting in 2012. In addition, the debt would be forgiven after 20 years instead of 25, as current law allows. For many who struggle to manage their student loan debt – including teachers, nurses, public defenders and others in lower-paying jobs – these proposed changes could reduce their payments by hundreds of dollars each month. Overall, this proposal would provide an estimated 1.6 million borrowers with more manageable monthly payments.
The Administration is also planning to offer student borrowers the chance to better manage their debt by consolidating their federal student loans. Today, approximately 5.8 million borrowers have both a Direct Loan (DL) and a Federal Family Education Loan (FFEL) that require separate payments, which makes them more likely to default. To address the needs of these borrowers, the Administration will allow borrowers the convenience of a single payment to a single lender for both loans. Borrowers who take advantage of this consolidation option, which begins in January, would also receive up to a 0.5 percent reduction in their interest rate on some of their loans, which means lower monthly payments that would save hundreds of dollars in interest. Eligible borrowers will be contacted by their federal loan servicer early next year with information on how to consolidate.
These changes carry no additional cost to taxpayers.
Below are my thoughts and concerns related to this press release and what is not being said:
1) What is not mentioned about IBR is that if a borrower has no income, they can have monthly payments of $0 and still be in repayment. This is and has always has been the case with IBR since its implementation in 2009. For first year residents beginning residencies in July 2012, nothing has really changed according to the announcement, but what may change is that the IBR calculation will be based on 10% of income instead of 15%, which is currently the case. The IBR Repayment Plan calculation is currently ((AGI – 150% of Poverty)* 15%)/12. According to the announcement, beginning July 1, 2012, the new calculation will be ((AGI – 150% of Poverty)* 10%)/12. Residents who graduated in 2011 were looking at zero payments based on this current IBR calculations during their first year of residency since many of them did not have income in tax year 2010. For the Class of 2012, once again many will likely have a zero payment in their first year of IBR.
2) Unfortunately, in the announcement and information I have seen thus far, there is no disclaimer regarding the ramifications to borrowers of reducing their monthly payments from 15% to 10% of discretionary income. Obviously we know that the less you pay now, the more you will pay overall because of interest accrual and negative amortization in IBR. It is not clear what the administration is thinking here, but in respect to current borrowers the assumption is that they will not be earning modest salaries for a long time period, will be in repayment (in IBR) for 20 years, and will have a loan balance after 20 years to be forgiven. With the Public Service Loan Forgiveness (PSLF), the forgiveness timetable is 10 years or 120 Direct Loan IBR payments as long as the borrower is working in a not-for-profit. For medical residents, the residency training counts as working in a not-for-profit and with 80% of hospitals 501 C 3 organizations, there is anticipation that many will realize the PSLF and not the IBR forgiveness of 20 years, or the current 25 years. Of course, some medical professions lend themselves to working in for-profit scenarios.
3) The question that needs to be answered by the U.S. Department of Education is whether the proposed IBR monthly payments of 10% (versus the current 15%) of discretionary income is suggested to take effect in 2012 for NEW borrowers only or for ALL borrowers in IBR? The legislation currently reads that the 10% to be implemented on July 1, 2014 and President Obama wants to advance to 2012, is for NEW borrowers after that date. By advancing the date to 2012, are ALL borrowers eligible, whether new borrowers or old borrowers?
4) All of the above questions, need to be clarified so we are able to respond to our recent graduates who may be consolidating (initiating it now or in progress) with their loans entering repayment in January? Will they receive a 0.5% interest rate reduction if their consolidated loan is completed by January 2012 or December 2011? What about the “rounded up to the nearest 1/8th of a percent” weighted average interest calculation that DL uses when calculating the interest rate of consolidated loans? How will that play into this? For current medical students and soon-to-be-graduates, a large majority have only borrowed through Direct Loans, so consolidation is not in the future?
As you can see, I personally have a lot of questions about the recent announcement. But, I wanted to share my thoughts with you so that you are aware of what is still unclear and how it may impact your future management of your student loans.