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President Announces Student Loan Reform; Bypasses Congress

October 28, 2011—President Obama Oct. 25 announced changes to federal student loan repayment and consolidation programs designed to “increase college affordability by making it easier to manage student loan debt.”  The administration is moving forward with a new “Pay As You Earn” proposal that would limit monthly loan payments to 10 percent of discretionary income for an estimated 1.6 million borrowers. Additionally, starting January 2012, an estimated six million borrowers will be able to consolidate their Federal Family Education Loans (FFEL) and reduce their interest rates. These changes are intended to be made under executive order at the Department of Education without congressional approval. 

Pay As You Earn effectively speeds up the implementation of changes to Income-Based Repayment (IBR) that were enacted under the Health Care and Education Reconciliation Act (P.L. 111-152), but only would have applied to new borrowers and not until July 1, 2014.  Pay As You Earn would decrease ― from 15 percent to 10 percent of discretionary income ― the cap on monthly payments under IBR.  Additionally, the program would reduce the 25-year loan forgiveness option to only 20 years, a provision medical students are not likely to attain. Pay As You Earn only will be offered to borrowers who have a loan from 2012 or later and took out their first loan no earlier than 2008. 

The president also announced a new temporary Special Direct Consolidation Loan. Beginning in January 2012, borrowers will be eligible for a reduced interest rate consolidation loan if they have at least one FFEL loan in grace, deferment, or repayment, as well as one Direct loan. Of these loans, only the FFEL loans will be consolidated under the special interest rate. The interest rate of the FFEL loans will be calculated by a weighted average less a 0.25 percentage point reduction. The department will continue to offer another 0.25 percentage point reduction if the loan is paid through their automatic debit system. Private loans, Perkins loans, HRSA’s Title VII health professions student loans, and loans in default will not be eligible for special consolidation.  Borrowers will be contacted by the department if they are eligible and then must act by June 30, 2012, to take advantage of the interest rate reductions. 

The department has posted a website about the new special consolidation, but official details about Pay As You Earn have yet to surface.

Contact:

Matthew Shick, JD
Director, Gov't Relations & Regulatory Affairs
Telephone: 202-862-6116
Email: mshick@aamc.org

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Washington Highlights, a weekly electronic newsletter, features brief updates on the latest legislative and regulatory activities affecting medical schools and teaching hospitals.


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For More Information

Jason Kleinman
Sr. Legislative Analyst, Govt. Relations
Telephone: 202-903-0806
Email: jkleinman@aamc.org