Can You Shrink Your Student Loans?
President Obama announced a new plan that reduces payments on some federal student loans, and is speeding up the start of another plan that lets some graduates reduce their payments and stop paying for loans altogether after 20 years.
Not all student loans are part of this plan. The plan requires students who have at least one federal direct student loan (a Direct Subsidized Loan, or a Stafford Loan) and one federal loan that was taken out through a bank or other lender to combine, or consolidate, them and pay a lower interest rate. This includes PLUS loans that many students take out as well. To be eligible, you must not have defaulted on these loans.
This program does not include Perkins loans or private loans taken with a bank or other lender. (Remember, you qualify if you took out at least one federal student loan through a bank and at least one directly from the government.)
Now it’s time to see how you’re doing in that math class! Under the new plan, you reduce the interest rate for each loan by 1/4 of one percent. The new interest rate will be the average of all these rates you just calculated. You have to let the government deduct your payments directly from your bank account each month.
If you have a grant such as a Pell Grant, this is money the government has given to you. You do not pay it back.
If you aren’t sure which loans you have, don’t worry. The Department of Education will be sending out notices to students who are eligible for the program in January. Enrollment begins in January and runs through June 30.
If you took out federal student loans through a bank but none directly from the government, you can still consolidate those loans under the existing loan consolidation program.
The other big news is that the government is fast-forwarding another program that could let more people qualify to make lower payments on federal direct loans and stop paying altogether after 20 years. This program is limited to certain public service jobs and people who work in low-paying fields. (There is another formula to use to figure out if you can qualify for this, but I won’t get into it here). This program, which was passed by Congress last year, wasn’t supposed to begin until 2014, but the President is jump-starting it next year.
This plan is only for new borrowers who take out loans in 2012 and who have taken out loans since 2008. Students and graduates who took out loans in 2011 and earlier are not eligible. They can apply for the current program, which is not as generous (payments can stop after 25 years, for example) if they haven’t already done so.
As with the other program, you cannot be in default on any federal student loans. You will also have to consolidate your loans to apply.