Brace yourself: big changes are coming to your student loans. For years Congress has been working to pass legislation to help rope in swelling student loans. But much like everything else that’s government-related, it’s important that you read the fine print.
That’s where we come in.
Student Loans: Debunked
The first major change is the expansion of the Pay As You Earn program. This program, which was first introduced in 2012, caps your monthly payments at 10 percent of your income. This means that students who are struggling with their finances (and who isn’t?) will have more flexibility with how much they’re expected to pay back per month. What’s more, after 20 years’ worth of consecutive payments your loans are forgiven.
Beginning in December 2015, Mr. Obama will be expanding this program to include a growing number of borrowers. Individuals who borrowed loans before October 2007 or stopped borrowing by October 2011 will now be eligible for Pay As You Earn.
Broadening the program’s eligibility means an estimated 5 million more people will be able to take advantage of lowered rates.
Increasing the Pell Grant
Fortunately, The Pay As You Earn program isn’t the only thing that’s getting a makeover; changes to the Pell Grant are also underway. Created in 1972, the Pell Grant was established to help low- to mid-income students afford to go to college. But while the Pell Grant once covered more than half of the total cost of a college degree, it currently doesn’t even cover a third.
The average cost of a four-year degree in 1980 was around $3,000. Nowadays, it’s over $22,000. And while Congress has been trying to make the Pell Grant consistent with today’s soaring inflation rates, progress has been sluggish.
In 2007 Congress passed a colossal act in an ongoing effort to make sure Pell Grants were sufficiently funded. Known as the College Cost Reduction and Access Act, the aim was to give more money to students every year.
From 2007 to 2010 funding for Pell Grants skyrocketed from $14.7 billion to a little over $35 billion, but while the expansion has definitely been noted, it’s not enough to bridge the gap between student and debt. According to a statement released by the White House, “71 percent of those earning a bachelor’s degree today graduate with an average debt of $29,400.”
Congress: Making Student Loans (Slightly) More Affordable
Because student loan rates are higher than they’ve ever been, more and more people are forced to default on their loans. In fact, the Department of Education’s most recent statistics show the number of defaulters has increased over 500,000 in the past year. That puts the total number of people who simply can’t afford to pay their student loans at around 7 million.
Defaulting isn’t pretty. When you default on your student loans, you’re basically handing your payments over to the government. Here’s what can happen:
- Monthly Paycheck Garnishes: Your financial institution and/or government can automatically take money out of your paychecks, up to 15%.
- Federal Benefits Forfeited: The government can take your Social Security, disability or other federal benefits to pay off your loans.
- Credit Score Plummets: Defaulting on your student loans can negatively affect your credit report, which in turn may help your chances of finding a job.
- Lawsuits: The government and private lenders may also sue to collect your defaulted loans.
*If you’re currently having trouble making your minimum student payments, it might be worth giving our credit counselors a call. Click here to see what you can do to avoid defaulting.
The best way to keep up with your student debt is to know your options. While policies regarding student loans will continue to change, it’s important that you stay mindful of what these changes are and how they can affect you.