Today new benefits go into effect that will make monthly student loan payments more manageable and affordable for millions of students and borrowers struggling to stay afloat in this tough economic climate.
These benefits were enacted as part of the College Cost Reduction and Access Act, a law I sponsored in 2007 that made historic investments to help more Americans earn a college degree. With the economy against this year's college graduates, this relief couldn't come at a better time.
First, a new Income-Based Repayment program takes effect that allows borrowers to cap their monthly loan payments at just 15 percent of their income, based on their family size. Any current or future borrower whose student loan payment exceeds 15 percent of their discretionary income is eligible. After 25 years in the program, borrowers' remaining student loan debts will be completely forgiven.
Take for example, a recent graduate with $30,000 in federal student loans and a starting salary of $25,000. Under an Income-Based Repayment plan, this borrower's monthly loan payment would be reduced to $110 a month -- a third of the $345 they would be required to pay under a standard 10-year repayment plan.
Second, the interest rate on subsidized -- or need-based -- federal student loans also drops today, from 6 percent to 5.6 percent. Anyone taking a loan after today will benefit, meaning that for millions of students and families sitting down to plan for this fall's expenses, they'll have a lower, more affordable interest rate locked in for the life of their loan. This is the second annual cut in these interest rates; they will continue to decrease until they reach 3.4 percent in 2011.
Third, our nation's neediest students will be able to receive a Pell Grant scholarship of $5,350 this fall that will cover a much larger share of their college expenses than year's past, a $600 increase above last year's award. A generation ago the Pell Grant covered about half of a student's tuition expenses; thirty years later, the purchasing power of the scholarship has dramatically declined.
Finally, for the surge of Americans interested in public service, a recently-established program exists to make it easier for workers with hefty debt loans to go into critically-needed, but typically lower-paying fields. Under this public service loan forgiveness program, workers who work in public sector fields -- like teaching, nursing, public interest law, non-profit work, and more -- will see their federal student loans completely forgiven after 10 years of service and loan repayments.
This good news is long overdue for students, their families -- and especially for this year's graduates.
In previous years, students could borrow for college with the assurance that a steady salary awaited them upon graduation. Unfortunately, in this economy, that same cushion doesn't exist.
At 2.3 million, the class of 2009 is the largest class to graduate college to date -- into the toughest job market for young workers in 25 years. In May, unemployment among 20-24 year olds topped 15 percent -- up from 9 percent a year ago. According to the National Association of Colleges and Employers, just 20 percent of 2009 graduates who applied for a job have one -- that's a thirty percent decrease from two years ago.
These graduates are entering this economy with plenty of financial baggage already in tow. The typical student now borrows about $22,000 in federal and private student loans to pay for college. Many borrowers already spend high percentages of their paychecks making student loan payments, especially in expensive cities across the country, where juggling student loan payments with rent, utility bills and other basic expenses can be daunting.
These new benefits will give borrowers a much-needed lifeboat.
The Income Based Repayment and loan forgiveness programs will alleviate some of the stress working families feel when repaying their loans and will empower Americans to go into critical public service jobs -- allowing them to keep their primary focus on their interests, not their outstanding loan balances.
In this economy, every little bit of help counts. For the class of 2009, these benefits may be just the graduation gift they've been waiting for.
(Cross-posted at the EdLabor Journal.)