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HSFPP Update # 257—What Can be Done About Student Loan Debt?
Message from Flashman: Higher education is vital for many of our young people, but student loan debt often cancels out its financial benefits of higher paychecks and greater security. Worse yet, most educational debts cannot be cancelled. Efforts are now being made to address the situation. They only solve part of the problem, but they are better than nothing. We hope that this week’s update will help students investigate their options as they prepare for college.
Educators might want to supplement this lesson by use of Updates # 246 and 249. Update # 249 should be helpful for all students, including those not planning for college.
Message from Nicole: As a current debt holder of student loans, this week’s story In the New$... hits close to home for me. Combined with my husband and brother, the student loan debt in our family amounts to tens of thousands of dollars. While the educational experiences and benefits outweigh the amount of debt we’re taking on, we feel a big relief at the prospect of this new proposal.
Students need to know all their options. Qualifying for this type of loan alleviation could be the difference between getting the quality education one wants or possibly feeling the need to settle for a two-year education. Students should be more concerned about the quality of the program they are considering than about the amount of money required, but limited funds force many students to put money questions first.
Kentucky Academic Expectations:
Academic Expectation 2.33
Students demonstrate the skills to evaluate and use services and Expectation resources available in their community.
Academic Expectation 2.37
Students demonstrate skills and work habits that lead to success in future schooling and work.
Web Site Pick of the Week:
U.S. Department of Education’s IBR calculator
While this calculator may not be entirely useful for high school students before they enter college, it will be exceptionally helpful after graduation. IRB stands for Income-Based Repayment, which is an option for repaying student loans currently offered to graduates who are drowning in their monthly loan payments because of their "lack of income" situation.
In the New$.... What Can be Done About Student Loan Debt?
by Nicole Stork-Hestad, Ph.D. Student, Family Sciences, University of Kentucky
Having to worry about how to pay for college is the biggest downer about higher education. Too many students give up on college because of financial concerns. Unfortunately, this means significantly lower lifetime earnings for most who don’t go to college. However, the Obama Administration recently announced a proposal that could take away some of the stress of repaying student loans, making going to the right college more affordable for students.
The newly expedited “Pay As You Earn" (PAYE) repayment plan, which will now go into effect in 2012 rather than 2014, has two main parts (USA Today):
- It “Expands a program that allows federal student loan borrowers to apply for a reduction in their loan payments based on their income,” and
- It allows “Borrowers who have both Federal Family Education Loans, which are federally guaranteed loans issued by private lenders, and Direct Loans, which are issued directly by the federal government, [to] lower their interest rate by a half-percentage point through consolidating all of their loans into the Direct Loan program.”
The main features of the "Pay As You Earn" repayment plan are (Bills.com):
- Consolidation: “Borrowers with direct government loans and government-backed private loans [can] consolidate their loans into one new loan.”
- Size of Payment: “Student loan payments will be limited to 10% of a graduate's income,” which is 5% lower than the current limit of 15%.
- Debt Forgiveness: “The unpaid portion of the student loan debt is wiped out in 20 years, if the borrower has made loan payments as agreed,” which is 5 years earlier than the current law, in which the debt is forgiven after 25 years.
According to Bills.com, “The White House estimates that the changes will affect 7.4 million people, which is about 20% of the approximately 36 million people with federal student loans.” This should help a bad situation, especially since national student loan debt is now nearly $1 trillion. However, not everyone is eligible for the PAYE student loan repayment option. The plan’s main focus is on recent borrowers; it doesn't help borrowers with prior loans before 2008, who are in default or who are paying off private-lender student debts.
The good news for high school students now planning for college and taking out loans is that the new loan forgiveness program is designed to help them. In order to benefit from the new 10% IBR plan, a student must (Bills.com):
- Take out all loans in 2012 or later
- Have taken all loans after 2008 and at least one new loan after 2012
Not all of the originally proposed changes will go into effect right away. Details must still be worked out in upcoming sessions.
For more information on additional repayment options (including helpful calculators), visit: http://studentaid.ed.gov/PORTALSWebApp/students/english/OtherFormsOfRepay.jsp.
Sources: Bills.com. (2011, November 2). Three-part announcement aims to ease repayment burden for 5.8 million student loan borrowers. Retrieved November 9, 2011, from http://www.bills.com/obama-student-loan/.
Block, Sandra. (2011, October 26). Plan hopes to make student loans more forgiving. USA Today. Retrieved November 9, 2011, from http://www.usatoday.com/money/perfi/college/story/2011-10-26/college-student-loan-relief/50942832/1.
Madison, Lucy. (2011, October 26). Who will benefit from Obama’s student loan plan? CBS News. Retrieved November 9, 2011, from http://www.cbsnews.com/8301-503544_162-20126172-503544/who-will-benefit-from-obamas-student-loan-plan/.
Student Loan Borrower Assistance. (2011, October 28). Obama Administration’s student loan proposals. Retrieved November 9, 2011, from http://www.studentloanborrowerassistance.org/2011/10/28/obama-administrations-student-loan-proposals/.
- What does it mean to take out a federal or federally-guaranteed student loan vs. a private-lender student loan?
- How will the PAYE plan affect you differently if you take a federal student loan as opposed to a private student loan?
- How does it help you personally with the plan becoming effective in 2012, rather than 2014?
In Class Activity:
As a class, examine the sample "shopping sheet" found at http://www.consumerfinance.gov/static/students/disclosure.pdf. Look over the information carefully and determine which information is most important when deciding whether or not it is financially cost-effective to attend a particular college.
After this, complete together the feedback form available at http://www.consumerfinance.gov/students/knowbeforeyouowe/, a Web site sponsored by the Consumer Financial Protection Bureau.
Completing this activity will give you the opportunity to think critically about what financial information is important to you when selecting a college.
Kentucky High School Financial Planning Program
The purpose of the HSFPP financial updates, video lessons, and Web site is to assist county Extension agents, credit union educators, high school teachers, and parents who home school their teenagers so that they may improve the economic well-being of our teenagers; and also to show educators how the HSFPP, updates, and video lessons meet Kentucky core concepts. The Web site, updates, and video lessons are provided by the University of Kentucky Cooperative Extension Service, and are free to all educators. The list of core concepts and order form for free program materials including the student guide and instructors manual can be found on the Kentucky HSFPP home page.
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