On Wednesday, under the College Cost Reduction and Access Act of 2007, the repayment of college loans will become a whole lot more manageable for lower income wage earners.

New Options

The new Federal Student Loan Forgiveness Law is set to help student repayment in two significant ways:

• Lowering the monthly student loan payment on federal student loans (Income Based Repayment or IBR); and

• Canceling remaining loan debt after 10 years for those who have entered public service (Loan Forgiveness for Public Service).

Income Based Repayment (IBR)

Income based repayment (IBR) offers enormous potential reductions in the monthly payments for high debt/low income borrowers. Designed for those with “partial financial hardship,” IBR limits annual educational debt payments to 15% of a borrower’s discretionary income. For the purposes of the law, discretionary income is defined as adjusted gross income minus 150% of the poverty level for the borrower’s family size.

Under the IBR plan, the loans eligible for consideration include: all Federal Direct Loans (FDL) and federally guaranteed loans (FFEL) including subsidized and unsubsidized Federal Stafford loans; Federal Grad PLUS loans (but not Parent PLUS loans); and Federal Direct Consolidation loans. Federal Perkins Loans are only eligible when part of a Federal Direct Consolidation Loan.

The Detroit Free Press offers the following as an example of the potential savings:

Take a college grad who has $40,000 in federal student loans and an adjusted gross income of $30,000 each year.

If we use this example, the grad would pay $171.94 a month using the new plan — compared with $460.32 with a standard 10-year repayment plan or $277.63 a month for an extended 25-year repayment plan.

As a person receives annual salary increases, the monthly payment would rise only according to the percentage of salary increase. In the case of a married couple, each would be eligible for the program and the eligibility would be dependent on each individual’s situation, not the combined income of the two individuals.

The new IBR option goes into effect July 1, 2009. Members of the Class of 2009 become eligible within two months of graduation.

Loan Forgiveness for Public Service Employees

In addition to repayment reduction under the law, students entering public service are also eligible for loan forgiveness. Upon entering full-time public service, once a borrower makes 120 qualifying loan payments on a Federal Direct loan (including Federal Direct Consolidation loans), the unpaid balance remaining including the accumulated interest on the loan is forgiven. The worker must remain in public service for the entire ten year period and the 120 payments timeframe but there is no limit to the amount to be forgiven.

The time period for public service is retroactive to October 1, 2007 meaning those borrowers who have already elected public service may begin counting the ten year period at that point. Some restrictions occur for those who had already consolidated their loans and those restrictions may move the eligible period forward to July 1, 2008.

In the case of loan forgiveness, only Federal Direct loans (including Federal Direct Consolidation loans) are eligible. Payments made on federal loans in the Guaranteed (or FFEL) program are not eligible for the loan forgiveness aspect (only eligible for IBR).

A Major Step Forward

The new law represents an enormous positive development for those students who have accumulated significant federal college debt yet have limited income. To learn more about the program and examine the calculation process visit:

• Georgetown Professor Phil Shrag’s law review article detailing IBR and Loan Forgiveness for Public Service Employees (pdf).
• The IBR monthly repayment calculator.
• Federal direct consolidation loan information and applications.

College Cost Reduction Act “Soft” on Low-Income Students

The College Cost Reduction Act of 2007 passed the House and Senate, but is likely to be hung up with negotiations before it hits President Bush’s desk. Bush has threatened to veto the new measure due to the flimsiness of the bill in regards to low-income students. Many politicians have talked up the bill’s success, but much of this is marketing rhetoric.

As it currently stands, the College Cost Reduction Act is more oriented to post-college individuals, less focused on current students and those most challenged to get a college degree.

The biggest winners are the Pell Grant recipients—they will likely receive a significant boost in funds, although still far short of the funds once available only a few decades ago.

The bill cuts major subsidies to student loan lenders that offer the FFEL program. This action seems almost a reprimand for the past months’ worth of controversy brought on by unscrupulous and greedy lenders.

Components of the CCR Act:

• Pell Grants will be increased from $4,050 to $4,900 and a maximum $5,200 by 2011.
• Students pursuing a teaching profession stand to earn full tuition compensation in exchange for service in underrepresented schools. This takes calculated aim at the problem of inadequate teachers in poor schools.
• Forgiveness of student loans owned by public service professionals, including law enforcement, firemen, nurses, and even librarians after 10 years.
• $500 million in new investments to minority and underrepresented institutions.
• Student loan interest cuts for need-based loans.
• Federal student loan maximum borrowing limits to be increased.

“Drug Provisions” Remain Uncertain

Part of the proposed amendment to the Higher Education Act still faces an uncertain future. Currently any student convicted of a drug offense is summarily denied government aid regardless of how trivial the offense. Some sources suggest that the number of students affected by this controversial contingency is well over 100,000.

The FAFSA form requires applicants to answer the “drug conviction” question.

This “drug offense” measure was zipped onto the Higher Education Act of 1965 as the Aid Elimination Provision of 1998, also called the Souder Amendment.

It’s no secret that the average college graduate accumulates thousands of dollars in student loan debt. With some financial aid decreasing and tuition increasing, the future college graduate has to wonder if he or she can indeed make those loan payments on their beginning post-college salary.

While various entities and organizations address the problem of affordable higher education on a fairly consistent basis, some are offering innovative methods with which to accomplish the goal.

Just last month, a new loan forgiveness program for Iowa teachers who teach in critical shortage areas such as math, science and special education was unveiled. This program, the third such program for which Iowa teachers can qualify may forgive up to $9,000 in student loans over a period of five years. It’s called the Iowa Student Loan Teacher Educational Loan Forgiveness Program and has been implemented by a non-profit organization that uses interest income from student loans to benefit students.

According to the Des Moines Register, an Iowa teacher that qualifies for all 3 loan forgiveness programs could have as much as $30,500 over five years in student loans forgiven.

An article in the Stanford Report on October 4th, and picked up by the Associated Press the following day, highlights a new loan forgiveness program. The Stanford Teacher Education Program (STEP) is a Master’s program that will forgive half of a student’s loan after teaching for 2 years and the full amount after teaching for four years.

Student’s who qualify for the STEP program could receive up to $65,000 in loans and other aid to cover program and other expenses, including living expenses.

Stanford University is matching a $10 million dollar gift from an alumna to fund this program. The only criteria, as far as where a teacher must teach in order to qualify for the program, seems to be somewhere between the grades of Kindergarten and the twelfth grade for public school teachers and underserved communities for private school teachers.

Although it may be tempting to pursue such a career specifically to benefit from loan forgiveness, it may be best summed up by one Drake University student who plans on teaching English and therefore would not qualify for Iowa’s loan forgiveness program. “Teaching is a passion,” she states, “You have to love what you do. You don’t want to go into it just because they’re going to pay off all my loans.”