New student loan legislation signed by President Barack Obama will lower borrowing costs for millions of Americans with college debt.
The President signed an executive order that expands a 2010 law that allows borrowers to cap their federal student loan repayments at 10% of their income. Among the provisions in the legislation, college grads will be able to have student loan forgiveness – by essentially getting their loans written off – after either 10 or 20 years of repayments.
Separately, Obama is also calling for more borrowers with both federal and private student loans to be able to refinance into loans with lower interest rates.
All this comes as good news to those with student loans. Currently, more than 70% of all college graduates coming out of school leave with student loans, averaging $33,000 in 2014.
Pros and Cons of Federal Student Loans
If you absolutely must borrow for college, you can obtain two types of student loans: federal loans and private loans. You always want to get federal student loans first because these loans usually have fewer fees, lower interest rates, and more flexible options, such as better loan forgiveness or loan deferment plans.
As I describe in my forthcoming book, College Secrets: How to Save Money, Cut College Costs and Graduate Debt-Free, the main “drawback” about federal student loans is also, in some regards, an “advantage” with these loans – namely that the federal government imposes loans limits.
Dependent students are currently limited to taking out a total of $31,000 in federal loans and independent students can borrow no more than $57,000 in total federal student loans. These limits represent a “drawback” to the extent that federal loans may not be sufficient to cover your financial needs, which is one reason why many students also turn to private loans. But having caps on federal student loans may also serve a positive purpose: keeping some borrowing in check.
Income-based Repayment Explained
With federal student loans, you can choose from four loan repayment plans:
- the 10-year standard repayment plan
- the 10-year graduated repayment plan
- the extended repayment plan
- an income-related repayment plan
It’s this latter category – related to income-based repayments – where President Obama’s student loan program will take effect.
Check out this video for more student loan tips and specific info on how the President’s new student loan plan will affect you – including when you can take advantage of Obama’s new student loan options.
