Federal Bill Lowers Student Loan Payments Starting July 1

June 25, 2009 by Suzanne Conlon

On September 27, 2007, President George W. Bush signed into law the College Cost Reduction and Access Act.  A major provision of the act, which will result in loan forgiveness for some borrowers, goes into effect July 1, 2009.

According to Section 203 of the act, “Loan payments will be limited to 15 percent of a borrowers discretionary income or 15 percent of the amount that a borrower’s . . . adjusted gross income exceeds 150 percent of the poverty line, divided by 12.  Unpaid interest and principal are capitalized and any outstanding loan balance is forgiven after 25 years of repayment.”

“The Department must repay or cancel any outstanding loan principal and interest for borrowers after 25 years of repayment.” The bill also cuts interest rates on subsidized Stafford loans for undergraduate students in half.

For loan recipients who spend 10 years in public service fields, loans will be completely forgiven.  Because of the cuts to repayment amount, interest rates, and the 10 and 25 year forgiveness clauses, recipients—especially those who choose to work in public service jobs—could ultimately pay thousands of dollars less than they originally owed upon graduation.

“The U.S. college affordability crisis is only worsening and to top it off, this year’s graduating class is about to enter the toughest job market for college graduates in 25 years,” said Rep. George Miller, Democratic chairman of the House committee that worked on the bill.

15.5 percent of adults aged 20 to 24 were unemployed as of May 2009.

Borrowers will have to provide annual reports of income and family size in order to renew their participation in the program, which is referred to as “Income-Based Repayment.”  If income increases over a certain amount, the payments will also return to their original amount.

There is great concern about student loan payments among borrowers.  A Facebook group called “Cancel Student Loan Debt to Stimulate the Economy” has more than 138,000 members.  Robert Applebaum, a lawyer who graduated from law school with $80,000 in student loan debt, started the group.  The group aims to encourage Congress to take further action to decrease loan debt for recent graduates.  Applebaum, in spite of having a law degree, earns only $36,000 per year and had to put his loans in forbearance for five years, causing his debt to grow from $80,000 to $100,000.

“I think the economic crisis and the sort of clamor from borrowers like we see on that Facebook group should help make that case,” said Edie Irons, spokeswoman for the Project on Student Debt, a nonprofit organization that raises awareness about student financial aid.