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Big Changes to Federal Student Loans in 2012

Loan Forgiveness, Reduced Payments, and More

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In late 2011, President Obama made some major announcements highlighting changes to the federal student loan program. The changes come on the back of some troubling news: today’s students are graduating with more debt than ever before, are facing the very real prospect of unemployment, and are saddled with years of burdensome monthly payments.

The changes to the student loan program were implemented, in part, as a response to a We the People petition asking the president to "forgive student loan debt to stimulate the economy and usher in a new era of innovation, entrepreneurship, and prosperity." The changes were posted as a response to the online petition and in a statement from the President.

According to U.S. Secretary of Education Arne Duncan, the new rules will help students struggling with student loan debt. “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,” he said in an October 2011 press release.

Want to know how the federal student loan changes could affect your wallet? Here are the big ways they could help online college students save money in the coming years:

1. Consolidate your student loans for a lower interest rate. While all new student loans are Direct Loans, many graduates also carry the older Federal Family Education Loans. The government is attempting to streamline the lending process and move as many borrowers as possible into the Direct Loan program. Beginning in 2012, they are offering an incentive to borrowers that hold both types of loans. If you consolidate into the Direct Loan program, you can receive an interest rate reduction of up to .5 percent.

2. Reduce your student loan payments to just 10% of your income. If you have a large loan and a low-paying job, you may find it difficult to buy a house or afford to raise a family with those big monthly payments hanging over your head. In past years, graduates have been able to apply for hardship waiver reducing their student loan payments to 15% of their monthly income. Congress passed a bill mandating that the payment cap be reduced to 10% of a borrower’s income in 2014. Now, Obama has announced that that the reduction to 10% will begin in 2012 for many struggling graduates.

3. Get student loan forgiveness in 10 or 20 years. A loan forgiveness program was also scheduled to begin in 2014. However, the administration has decided to bump this program up a couple years as well. Starting in 2012, most federal student loans will be forgiven in 20 years (instead of 25 years). Borrowers employed in the public service sector (teachers, nurses, etc.) will receive loan forgiveness in just 10 years. Talk to your financial aid counselor to see if forgiveness applies to your loans.

4. Learn before you take out additional loans. One of the biggest problems with the current student loan system is that borrowers often sign their loan documents without fully understanding the terms and implications of taking out such a major decision. Many college graduates have been surprised to see the final loan figure and their expected monthly payment after they graduate. Now, the federal government is putting together educational information to help students understand exactly what they are committing to when they apply for a federal student loan. The “Know Before You Owe” program will give students an easy way to compare college’s financial options and make better decisions. This program has the potential to be particularly helpful for online students that often lack face-to-face assistance with financial matters and are sometimes tempted by for-profit schools that offer little in the way of financial aid disclosure.

Alongside the student loan tax breaks, these changes should make it more affordable for many graduates to pay back their loans. Want to learn more about how the student loan changes could affect you? Talk to your online college’s financial aid office, watch this explanatory video, or check out the government’s Student Debt Repayment Assistant.
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