Student loan repayment

The U.S. Department of Education has released new final regulations that strengthen key protections for distressed borrowers with federal student loans. The regulations also make conforming revisions to reflect legislative changes related to student loans.

The new regulations will make it easier for borrowers to get out of default and repay their loans by ensuring that “reasonable and affordable” payments to rehabilitate a loan are, in fact, reasonable and affordable. Consistent with the law, the final regulations specify that the rehabilitation payment amount must not be a required minimum payment, a percentage of the borrower’s total loan balance, or an amount based on other criteria unrelated to the borrower’s total financial circumstances.

In response to public comments on the draft rules submitted this summer by TICAS and others, the final rules require that borrowers seeking to rehabilitate defaulted loans be initially offered a payment amount based on what they would pay in Income-Based Repayment (IBR), which caps monthly payments at 15 percent of a borrower’s discretionary income. The draft rules would have allowed payments based on the IBR formula only after borrowers were offered and then rejected a different amount calculated by servicers and based on a long and complex form. In a change of course, the Department ultimately required payments based on the IBR formula to be offered first, in response “to the numerous comments we received expressing concerns about the amount of personal financial information a borrower requesting loan rehabilitation would [otherwise] have to provide.”

In addition, the final regulations permit borrowers who have been delinquent on their loans for at least 270 days to be placed in forbearance based on an oral rather than a written request. Borrowers in forbearance don’t have to make payments, but their interest keeps accruing and then capitalizes when the forbearance ends, leaving them owing even more.

To try to prevent institutions from pressuring borrowers to request oral forbearances during the period when institutions are held accountable for student loan defaults, the rules limit any forbearance granted based on an oral request to 120 days and prohibit consecutive 120-day forbearances. In another improvement over the draft proposal, borrowers who are placed in forbearance based on an oral request will receive written information, as well as an oral explanation, of their repayment options and how they can exit forbearance, as TICAS had recommended. The Department is allowing loan holders, colleges, and guaranty agencies to implement this rule on November 1, even though they are not required to comply until next July.

The Department publicly acknowledges the evidence “that some institutions are aggressively pursuing their former students to compel them to request forbearance on their loans, primarily during the cohort period when the institution is accountable for student loan defaults.” As detailed in our public comments, it’s well documented that some for-profit colleges have engaged in such abuses at borrowers’ expense while receiving billions of dollars in federal student aid. TICAS has identified steps the Education Department should immediately take to prevent such abuses.

Soon to be published in the Federal Register, the new rules also improve students’ access to loan discharges when schools shut down before they can finish their studies.  

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Starting tomorrow (Friday, December 21), recent college graduates with federal student loans can apply to lower their monthly payments using the Pay As You Earn plan. This new repayment plan has a lower monthly payment cap than the more widely available Income-Based Repayment (IBR) plan. Pay As You Earn also provides forgiveness after 20 years of payments, rather than 25 years in IBR.

As with any repayment plan that allows you to pay less per month, it is possible to pay more in the long run under Pay As Your Earn or IBR due to accumulated interest. But for millions of Americans currently struggling to repay their loans, these plans ensure that payments will be manageable, help prevent delinquency and default, and provide a much-needed light at the end of the tunnel.

Countering the effects of recession

Pay As You Earn is designed to help recent students entering the job market for the first time in today’s tough economy. Only those who took out their first federal loan after September 30, 2007 and had at least one disbursement after September 30, 2011 will qualify.

The negative effects of starting your career in a down economy can last more than a decade. According to a recent study from the Economic Policy Institute:

Research shows that entering the labor market in a severe downturn can lead to reduced earnings, greater earnings instability, and more spells of unemployment over the next 10 to 15 years. […] In short, the labor market consequences of graduating in a bad economy are not just large and negative, but also long-lasting.

Earlier this year we found that two-thirds of the Class of 2011 had loans, and their average debt was $26,600 for a four-year degree. Yet half of recent college graduates are either unemployed or underemployed. Compared to students who enter the job market in better economic times, recent and soon-to-be graduates are likely to face lower earnings and higher unemployment for many years to come.

Helping lower income borrowers

Borrowers with modest incomes, who need help the most, will get significant relief from Pay As You Earn. As we noted in a recent post, a student who graduated in 2012 or later with $26,600 in federal loans and earns $25,000 a year (adjusted gross income) would pay one-third less each month in Pay As You Earn than in the current IBR plan. The same is true for a married borrower with the same debt who just completed a bachelor’s degree, has two children, and earns $45,000.

The Department of Education reports that more than 1.3 million borrowers are already enrolled in IBR, and nearly 90% of them have incomes under $50,000.

Applying made easy

A new electronic form at makes it easy to apply online for Pay As You Earn, IBR, and related repayment plans. Borrowers can even ask to be enrolled in whichever income-based plan they qualify for that has the lowest monthly payment.

Together, these plans can help millions of borrowers keep their student loan payments affordable even in tough times.

NOTE:  TICAS and its Project on Student Debt developed the policy proposal that formed the basis of IBR, which recommended forgiveness after 20 years of payments. Dozens of organizations representing students, consumers, colleges, and lenders supported the goals of that proposal. Learn more about IBR and Pay As You Earn at

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The Department of Education released a lot of new information today pertaining to its July 26 proposal to define “gainful employment.”

The data is extensive and eye-opening. One thing that jumped out at us right away was the difference in student loan “repayment rates” by type of college. At public colleges, 54% of borrowers were paying down the principal on their loans, compared to 56% of those from private non-profit colleges. But at for-profit colleges, only 36% were paying down their student loans – which means that almost two-thirds of them couldn’t. At the University of Phoenix alone, that amounts to almost $2.8 billion in federal student loan debt that isn’t being paid down.

Read the data and analysis 

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On July 1, 2010, the U.S. Department of Education implemented two fixes to the Income-Based Repayment program which make borrower's student loan payments more affordable: Married Borrowers: When married couples both have federal student loans, they will no longer face higher IBR payments than their unmarried peers. For married borrowers who file their taxes jointly, lenders will factor in the couple's total federal student loan debt, as well as their total income, to calculate payments. Originally, IBR did not recognize that joint income has to cover both spouses' federal loan payments, resulting in payment requirements up to twice what two equivalent single people would have to pay. Baseline Debt: IBR eligibility will be based on either the balance when the loan first entered repayment or on the current loan amount, whichever is greater. This will allow borrowers whose loan balances have increased (often due to accrued interest during periods of deferment or forbearance) to qualify based on what they actually owe.

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On Wednesday, September 23, the House Judiciary Committee's Subcommittee on Commercial and Administrative Law held the first ever hearing about student loans and bankruptcy, "An Undue Hardship? Discharging Student Loans in Bankruptcy." Lauren Asher, president of the Institute for College Access & Success testified as an invited witness.

Over the past decade, the private student loan market expanded dramatically along with the overall credit market, fueled by easy access to capital. As with subprime mortgages,lenders marketed private loans very aggressively and financed them primarily through securitization, maximizing short-term profits regardless of borrowers’ actual ability to repay. There were no regulations to limit the dangers of private loans or to restrict the way they targeted young people with no borrowing experience. Prospective borrowers were not even entitled to clear information about actual terms and costs that would enable them to shop around before signing a promissory note. Private student loans remain largely unregulated, Congress included some basic disclosure requirements in the HEOA will go into effect early next year.

Private student loan volume began mounting well before the change in bankruptcy law: it increased eight-fold between 1997 and 2005, and it peaked at $19 billion in academic year 2006-07. Student Lending Analytics, which monitors industry trends, projects that volume in 2009 will be $10-12 billion. This drop parallels changes in the larger economy due to the credit crunch, which hit the private loan industry hard in the fall of 2008. While quite a few lenders left the market and private loans are now more likely to require a co-signer and a higher credit score than in recent years, private student loans are still available. Sallie Mae continues to make a third of its profits from private loans, and they along with Chase, Citibank and other major lenders offer and actively promote their private loan products. As these lenders work to expand their market share, credit unions have entered the field and seek to position themselves as a source for more affordable private loans.

In a particularly disturbing development, some large, for-profit colleges have begun making a lot of their own private loans directly to high-risk students. For example, in a recent call with investors and analysts, Corinthian Colleges, Inc. said it plans to make $130 million of such loans in the current fiscal year, on top of $120 million last fiscal year. They fully expect a shocking 56 to 58 percent of the borrowers to default. Yet they consider these loans good investments because they will increase enrollment and with it a profitable flow of federal grant and loan dollars that outweighs the planned writeoffs. Corinthian owns more than 80 colleges across the U.S. through its Everest brands. According to the Associated Press, ITT Education Services, Inc. also expects to make $75 million in loans directly to its students this Calendar year, and Career Education Corp. expects to reach $50 million.

These are attempts to get around market corrections that have appropriately reduced access to subprime private loans for very high risk borrowers, and to justify prices for-profit education and training programs that may exceed federal aid limits. As mentioned above, Sallie Mae has stopped lending to these types of schools because of similarly high default rates and other questionable practices. But whether the source is their own school or an outside lender, the students who are sold private loans they cannot afford are stuck with them even in bankruptcy, while the lenders are free to move on.

Read Lauren Asher's oral testimony

Read Lauren Asher's written testimony

Read the coalition letter

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Help is here!

The Income-Based Repayment option for federally-backed student loans went into effect July 1. It can help borrowers keep their loan payments affordable with payment caps based on their income and family size. For most eligible borrowers, IBR loan payments will be less than 10 percent of their income - and even smaller for borrowers with low earnings. IBR will also forgive remaining debt, if any, after 25 years of qualifying payments.

To apply for Income-Based Repayment, contact your lender directly. If you have Direct Loans from the U.S. Department of Education, start here. If you do not know who is servicing your loan, check the National Student Loan Data System database.

For more information about income-based repayment and public service loan forgiveness, please visit

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Information on IBR now comes in cartoon form! Check out our first-ever video, "Ditch Your Debt Gremlin," a two-minute animated introduction to IBR. Please share it on Facebook, email it to everyone you know, link to it from your blog, etc., to help get the word out about Income-Based Repayment before it becomes available on July 1.

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