In yesterday's speech on college affordability, President Obama announced plans that would make college more affordable for current and future students. But, there's nothing in the deal for people who are already struggling with their student loans payments.
Major Parts of the Plan
Starting next year, graduates would be able to consolidate Federal student loans from different programs at a slightly lower interest rate (reduction of 0.5%).
Also starting next year, student loan payments would not exceed 10% of the graduate's discretionary income and would be forgiven after 20 years. This part the plan speeds up changes to the income-based repayment plan which were previously set to become effective in 2014.
Both changes are expected to help students who borrow students loans after 2012 and Obama promised to move these changes forward without Congress if necessary. Obama says the changes won't cost anything for taxpayers.
The final announcement wasn't one that provides a direct financial benefit, but one that could help save money nevertheless. The new Consumer Financial Protection Bureau is working on financial aid shopping sheet to help students better understand what type of financial aid they're signing up for. If you're in college, going to college soon, or you're the parent of a current or soon-to-be college student, stop by and comment on what type of financial aid information you'd like to see on the shopping sheet.
When President Obama mentioned similar changes in his 2010 State of the Union Address, I pointed out two possible drawbacks of the plan. First, income-based payments may not cover the interest on the loan which could cause the balance to go up instead of down. Second, there could be tax consequences if you have more than $600 in forgiven student loans.
You have to be on the income-based repayment plan to get the 10% payment. Qualifications for the income-based repayment plan vary by income and family size. Payments on the IBR plan would go up as your income increased.
No Help for the Needy
Unfortunately, the changes don't provide relief for graduates who are currently struggling to pay their student loans. And the changes apply only to Federal student loans, which are seldom enough to cover full college costs especially considering the price of college continues to increase (see College Board's "Trends in College Pricing" Report).
For the first time ever, the amount of student loan debt has passed the amount of credit card debt. At least you can bankrupt credit card debt when you're completely in over your head. If you can't afford to pay your student loans, you're out of luck, unless you can somehow qualify for student loan forgiveness.