White House moves to ease student loan burden

The Obama administration unveiled new rules last week that aim to help ease the debt burden from loan payments that students face upon graduating from college.

The rules, promulgated by the U.S. Department of Education, offer new terms for the repayment of federal student loans that would cap the monthly payment in ratio to the borrower's income.

With the executive action, Obama moved up the effective date of a law Congress passed last year establishing the income-based repayment plan. Under that statute, affected borrowers would be able to cap their monthly payments at 15 percent of their monthly income. Beginning in July 2014, they could reduce that rate to 10 percent. Under Obama's plan, the 10 percent cap would take effect next year.

The administration estimates that the move could lower the monthly loan payments for 1.6 million borrowers.

Additionally, the plan would forgive the balance of a borrower's debt after 20 years of payments, down from the 25 year term under current law. Borrowers who work as teachers or other public service occupations would be eligible for student loan forgiveness after 10 years of repayments, under the Public Service Loan Forgiveness Program.

The domino effect of rising tuition costs

The move comes in response to concerns about the rising cost of tuition, an increase which of late has exceeded the rise in the rate of inflation, causing more students to borrow more heavily to finance their college education. Upon graduation, many of those students are saddled with a tremendous debt load as they enter a difficult job market. Aggregate debt from student loans recently eclipsed Americans' total credit card debt.

"We should be doing everything we can to put a college education within reach for every American," Obama told an audience of mostly students Oct. 26 in Colorado. "That has never been more important. It's never been more important, but, let's face it, it's also never been more expensive."

Under the new "Pay as You Earn" plan, a worker earning $45,000 with $60,000 in federal student loan debt could potentially see a reduction in monthly repayments of $451, lowering the obligation from $690 to $239, according to an example provided by the administration. Under the income-based repayment plan currently on the books, the maximum reduction the borrower would be eligible for would be $332 a month.

The administration's plan also includes provisions that will help students consolidate multiple loans into a single monthly payment. Under that program, borrowers could merge repayments to federal direct loans with the now-defunct federal family education loans beginning next year, a consolidation that would also entail an interest rate reduction of up to 0.5 percent.

"College graduates are entering one of the toughest job markets in recent memory, and we have a way to help them save money by consolidating their debt and capping their loan payments," Education Secretary Arne Duncan said in a statement.

Helping students understand their debt obligations

Additionally, the Education Department and the Consumer Financial Protection Bureau are looking to improve disclosure and transparency in the financial aid process. Their joint "Know Before You Owe" project is working to develop a clearer financial aid form, tentatively termed the "financial aid shopping sheet," that colleges can provide students that will make the financial aid process easier to understand. The agencies are soliciting feedback on how best to design the form at the bureau's website.