The federal student loan reforms announced by President Obama on Oct. 26 won’t help most students now in law school or recent graduates, because they are geared primarily toward undergraduates, according to student loan experts.
Obama unveiled several changes to the relatively new income-based repayment system for federal loans. His plan calls for reduced monthly repayments for borrowers with high debt and low income, and for a loan consolidation option offering lower interest rates. The reforms came amid increasing public pressure over mounting student loan burdens.
“Some of the information we have right now is preliminary, but what I’m being told by the Department of Education is that there will be some added relief for people on income-based repayment,” said Heather Jarvis, a student loan consultant. “It will be for people who borrowed their first student loan in 2008.”
That means law students who took out federal loans to help pay for their undergraduate degrees will see no benefit, Jarvis said. However, some law students likely will qualify for loan consolidation, she said.
The reforms apply only to federally guaranteed loans, not private student loans, said Radhika Singh Miller, program manager for educational debt relief and outreach at Equal Justice Works.
“What’s really missing is relief for those who had to borrow private loans,” Miller said. “And it’s not going to help those of us who have already graduated.”
The income-based repayment system went into effect for the class of 2009. The program limits monthly loan repayments according to income. Graduates who undertake long-term public interest careers can qualify for debt forgiveness.
At present, monthly federal student loan payments are capped at 15% of the borrower’s discretionary income, for people who signed up for income-based repayment. After the borrower makes qualifying payments for 25 years, the federal government will forgive any remaining loan debt. Last year, Congress modified the system to cap payments at 10% of a borrower’s discretionary income and forgive debt after 20 years. The changes were to benefit new borrowers beginning in 2014.
Obama would simply bump up the effective date to benefit graduates beginning in 2012 — provided they had not previously taken out federal student loans.
“It’s not going to change the options for most current law students,” Jarvis said. “They don’t want to open the floodgates.”
Still, the focus on income-based repayment was a good thing, she said. Many recent graduates who qualify for that option don’t know it. According to Jarvis, recent figures indicate that about 450,000 graduates have signed up for income-based repayment, although millions qualify.
One change that might benefit law students is loan consolidation. The government will start offering that option for federal loans with an interest rate between 0.25 percent and 0.5 percent lower than the going rate of 6.8 percent, Miller said.
However, the only people who will qualify are those with a combination of federal direct loans and federal family educational loans — the latter, better known as FFELs, a type of loan that the government eliminated in 2010.
Law students graduating in 2011 may qualify for the new consolidation option; the government has said it will notify those who are eligible. The option will go into effect in 2012, and the class of 2011 will begin loan repayments several months earlier than that, Jarvis said. Therefore, borrowers who graduated in May should make their initial payments before consolidating their loans, or else ask for several months’ forbearance while they check whether they qualify for the new consolidation option, she said. Previously consolidated loans will not qualify for the new, lower-interest option.
A 0.5 percent decrease in the interest rate may not seem like much, but it can make a significant difference over 20 or 30 years, Miller said.
“One difference it might have is a reduction in the level of defaults,” Miller said. “It makes things easier when you have just one loan to keep up with and you’re making a single monthly payment.”
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