Obama Announces Federal Student Loan Changes

Federal student loan changes announced this week by President Obama will have relatively little impact on NMU students, according to Mike Rotundo (Financial Aid). The administration’s plan would lower interest rates by 0.5 percent for students who consolidate federal bank-based loans into the U.S. Department of Education’s direct-loan program and sign up for direct deposit. It would also reduce the cap on the percentage of discretionary income that borrowers must repay.

“The consolidation piece won’t affect many students here because Northern has been involved in the direct loan program since 1993 and bank-based guaranteed loans through the Federal Family Education Loan Program (FFELP) ended at all schools about two years ago,” said Rotundo. “Students who started here as freshmen wouldn’t have both direct and guaranteed loans. To qualify for the lower interest rate, borrowers need both types and they need to be current students who have taken out a loan this year. Some transfer students or graduate students at NMU could be impacted if they took out a bank-based loan through their previous institutions, but it would be a small number. It’s important to note that this doesn’t affect private loans, only federal programs. But consolidation has been around for a long time. The second piece regarding the repayment plan might be more relevant to NMU students.”

Obama’s proposal moves up the implementation of a previously approved income-based repayment plan by two years. Borrowers’ monthly payments would be capped at 10 percent of their discretionary income, down from the current rate of 15 percent.

“Discretionary income is defined as 150 percent above the poverty line,” Rotundo said. “For a single person, that’s $16,335. So the required loan payment would be a defined percentage of only the salary that exceeds that figure. If you make $20,000 per year, you would pay 10 percent of $3,665. Under the current 15 percent requirement, the government waives any remaining balance after 25 years of payments. The change to 10 percent would also reduce that payment period to 20 years.”

The president said he would use an executive order to make the changes. Both programs would be in effect from Jan. 1-June 30, 2012.