As of July 1, legislation took hold that make big changes in the way student loans are paid back, expanding the rights and options for millions of debt holders. Why did they choose July 1? The school year starts some time in August or September and the fiscal year October 1, but the Department of Education is mandated to give a certain amount of advanced notice before making these regulatory changes regarding student loans. The time gap is mandated by Federal law so the public and any interested parties have time to provide feedback and comment to the Department of Education.
The changes are far reaching, but here are the 5 major points that will affect student loans as of July 1:
In 2013, Congress amended the laws that spell out how interest rates on student loans are calculated. As of July 1, the student loan interest rates will be determined by taking the 10-year Treasury note rate (as of the last auction in May) and adding a small margin. In 2014 that interest rate was 2.61, up .125 from 2013.
2. Loans will be fixed.
For decades, students had to stress and adjust to fluctuating interest rates as loans were based on variable rates that changed every July 1. Based on this new Act, any loan funded on or after July 1 will automatically have an interest rate set for the life of the loan, including Federal consolidation loans.
3. Income-based payback options for new borrowers.
President Obama recently signed Pay-As-You-Earn initiatives into law, including this reform that starts July1; on or after that date, loan holders are eligible for an income-based repayment plan that sets a ceiling on their payments at no more than 10% of their ‘classic’ disposal income plan. The previous rule was based on 15%, so this is a significant change when you consider the scope and magnitude of student loan payments. Also, after a borrower pays for a full 20 years, any remaining balance is forgiven – down from 25 years, previously.
4. Discharge for closed schools.
The old rules had provisions for schools that closed, leaving students stuck with debt but no degree. If a student enrolled in an institution that subsequently closed its doors within 90 days, and they were unable to complete their degree at another school, their federal student loans would be discharged. As of July 1, the new time frame will be 120 days, giving students of defunct colleges a little more of a safety net.
Instead of paying their loan in full to get out of default, borrowers now have two new options: rehabilitation and consolidation. Rehabilitation requires nine consecutive, on-time payments of a reasonable and affordable amount.
How is ‘reasonable and affordable’ defined? On or after July 1, the 15% rule comes into play. That rule mandates their payment will be initially calculated by taking 15% of their disposable income. If that amount is too high for them to reasonably pay, borrowers have the right to submit and form that documents their financial hardship and requests a special exemption.
Here is the exact language:
"...once the rehabilitation discussion has begun, initially considers a borrower’s reasonable and affordable loan rehabilitation payment amount to equal 15 percent of the amount by which the borrower’s Adjusted Gross Income (AGI) exceeds 150 percent of the poverty guideline amount applicable to the borrower’s family size and State, divided by 12. If the amount determined using this calculation is less than $5, the borrower’s monthly rehabilitation payment is $5."
Also, there is a new protocol guiding the administrative wage garnishment process. These new rules aim to standardize how the rehabilitation procedure unfolds for all borrowers, no matter which institution holds their federal loan.
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Do you have questions about these changes or would like to see if you qualify for new programs? Contact us and we'll walk you through it
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