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New rules tools help cash-strapped college borrowers

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NEW YORK (11/16/11)--Recent student loan repayment rule changes will ease the burden of skyrocketing tuition for millions of borrowers, but read the fine print: Not everyone qualifies (The New York Times Nov. 2).

College students who graduated in 2010 faced a double-whammy: the highest average debt on record ($25,250, up 5% from the previous year), and the highest unemployment level (9.1%) for new college graduates in recent history (The Project on Student Debt Nov. 3).

To speed up relief for struggling borrowers, President Barack Obama announced the new "Pay as You Earn" proposal on Oct. 25 that will allow about 1.6 million current students to cap loan payments at 10%, down from 15%, of discretionary income starting as early as 2012. The plan also allows loan forgiveness after 20, rather than 25, years of responsible payments.

Starting in January  an estimated six million students and recent graduates will be able to consolidate their federal student loans into a single Direct Consolidation Loan, with an interest rate reduction of up to 0.5%, potentially reducing the monthly payment by hundreds of dollars.

Despite clear objectives, the plan has raised a lot of questions. Understand the finer details of the loan consolidation changes:

  • Borrower eligibility: You must have at least one loan owned by the Department of Education and at least one commercially held Federal Family Education Loan (FFEL). The new plan only affects new borrowers--federal student loan borrowers who are new since 2008 with at least one loan that originated in 2012 or later. You're not eligible if you have loans from 2007 or earlier, or if at least one loan is not from 2012. This includes those who graduated in 2011 or earlier.
  • Loan eligibility: Federal loans eligible for the special consolidation program include FFEL Subsidized and Unsubsidized Stafford Loans, FFEL PLUS Loans, and FFEL Consolidation Loans. Loans must be in grace, repayment, deferment, or forbearance status. Perkins Loans, private student loans and many federal loans for people entering health professions are not eligible. Also, you are not eligible if you consolidate your loans into a traditional Direct Consolidation Loan before Special Consolidation Loans are available.
  • Limit: There's no limit to the number of federal loans you can consolidate.
  • Default: If you're in default on the loans, you're not eligible to consolidate.
  • Time frame: To qualify for the Special Direct Consolidation Loan, you must consolidate between Jan. 1, 2012 and June 30, 2012.
  • Wait: Even if you think you're eligible, it's critical that you don't take any action now. Eligible borrowers will be contacted by their federal loan servicer early next year with information about how to consolidate. For more information, visit
Two additional components of the plan include changes to the Income Based Repayment (IBR) plan, which lowers the payment cap to 10% of the borrower's discretionary income and allows forgiveness on remaining loan balances after 20 years:

  • Take advantage: More than 36 million Americans have federal student loan debt, but fewer than 450,000 participate in IBR. Eligibility is based on income and family size. Visit or to determine if IBR is right for you.
  • Weigh your options: If you work in a lower-income position that qualifies you for public service loan forgiveness after just 10 years, consolidating to a 20-year loan doesn't make sense.
  • Remember dates: The new IBR terms don't go into effect until July 1, 2012, in contrast to the consolidation timeframe that ends June 30, 2012.
Take advantage of websites and tools. Visit and click Special Direct Consolidation Loans, or call 800-4-FED-AID (800-433-3243). Check out the financial aid shopping sheet at And visit to use the Student Debt Repayment Assistant.

For more information, use "Calculator: What Will It Take to Save for a College Education?" in the Home & Family Finance Resource Center.