Is Student Loan Forgiveness the Answer?

President Obama announced changes to the “Pay As You Earn” plan on Wednesday, October 26, 2011 that would/could ease the repayment of student loans. According to the College Board, the average public in-state tuition rates are increasing 8.3 percent for the 2011-12 year.

President Obama pointed out that the average college graduate owes $24,000 in student loans and that the 2011 graduates have an average debt load of $27,300. USA Today reported that outstanding student loans will reach $1 trillion ($1,000,000,000,000) before the end of the year. Currently, student loan debt in America has surpassed credit card debt. Is this our next financial crisis?

The highlights of the “Pay As You Earn” plans or income-based repayment plans are to:

·        Start this option is 2012 (vs. 2014)

·        Cap student loan payments to 10% of discretionary income (vs. 15% )

·        Forgive any remaining balance after 20 years (vs. 25 years)

·        Support consolidation of direct government student loans with government-backed private loans helping an estimated 5.8 million people. This would essentially allow refinance the private loans at lower government rates.

According to a White House fact sheet, a teacher $25,000 in debt and earning $30,000 a year will see their payments reduced to about $114 a month.

Student loans do not go away in bankruptcy unless under extreme circumstances and it looks like this could be one alternative to help people who have a lot of student loan debt. Current repayment plans include the options of 1) Standard Repayment plan of 10 years with a minimum payment of $50.00; 2) Extended Repayment plan if you have more than $30,000 in Direct Loan debt -repayment over 25 years; 3) Graduated Repayment letting you start out with low payments and increase your payment amount every two years; 4) ‘income contingent’ and 5) ‘income-based’ repayment plan.

As you take on student loan debt, you have to decide if and how you will be able to repay your loan. These new changes may not be right for everyone, especially if you do not have a lot of student loan debt and you get a high paying job after graduation.

Borrow wisely, study hard, have fun and pick the right repayment plan for you.