Practical Solutions to Student Loan Reform

Practical Solutions to Student Loan Reform

President Obama has signed a law that aims to help students pay back their federal college loan debts. Beginning in 2014, borrowers are allowed to pay off no more than 10 percent of their income. The student loan reform act of 2013 allows any existing debt to be forgiven only after 20 years. Moreover, those who work in the public sector such as nurses, members of the armed forces and teacher qualify for loan forgiveness after 0 years, as long as they make their loan payments on time. Verify eligibility for Obama loan forgiveness here

Practical Solutions to Student Loan Reform

Key Features of the Student Loan Reform

Under the student loan compromise plan, about 11 million borrowers can expect a reduction in their interest rates on new loans that are taken out after July 1, 2013. In addition, over 8 million undergraduates who have new loans will see their rates drop significantly from 6.8 to 3.86 percent while borrowers of graduate unsubsidized Stafford loans are entitled to low interest rates of 5.41 percent.

Lastly, more than one million Parent PLUS and GradPLUS borrowers can qualify for 6.41 percent interest rates on their new loans.

With the compromise plan, an average undergraduate borrower with a debt of $6,922 can save at least $1,500 throughout the duration of the loan while a graduate who owes $25,600 is likely to save about $2,900. Aside from saving a huge amount on their loans, families and students are given an added protection of loan interest in case future market rates increase significantly.

The plan puts a limit on how high the interest rate on loans can rise, which give students great protection against drastic economic conditions in the future. The cap for undergraduate loans is at 8.25 percent, 9.5 percent for graduate loans and 10.5 percent for PLUS loans. There are also fixed interest rates included over the duration of the loan, thus protecting borrowers from financial risks when rates fluctuate over time.

These reforms on student loans are expected to put an end to current subsidies received by financial institutions, which make government-guaranteed loans. Beginning July 1, new loans will become direct loans that are collected by private institutions under the Department of Education‘s performance-based contracts. By ending wasteful subsidies, this can lead to about $68 billion for deficit reduction and higher education affordability for the next 11 years.

A Better Approach to the Student Loan Reform Act

Finding a definite and effective way to curb the massive increase in student loan rates remains a challenge to the government. In fact, the student loan reform act is only a short-sighted and “band-aid” solution as it subjects loan interest rates to market-based, yet without placing any cap on these rates. Hence, the approach merely keeps the rates low on a short-term basis only to allow the rates to increase greatly in the future.

A much better approach would be to combine a strong cap with a market-based rates while allowing borrowers to pay back their debts based on their disposable income. With this model, rates would easily track market conditions issued, yet these would remain fixed throughout the life of the loan.

Practical Solutions to Student Loan Reform

A strong cap and fixed rate could provide borrowers with a sense of security since they would be aware of their expected monthly payments immediately after taking out their loan. Thus, a drastic increase in interest rates will no longer threaten students and families when it comes to educational investment. Lastly, an annual adjustment of market-based fixed rates no longer puts the Congress in the tedious rate-setting process.

However, it is important to note that changes made to interest rates do not completely halt the rising defaults in this challenging economy. With this in mind, there is a great need for a more in-depth and broader improvement to the student loan process. There is a need for a more efficient loan servicing, counseling, and a simplified system that places borrowers into the income-based repayment scheme.

By allowing students to pay back their debts based on their income, borrowers will no longer have to pay more than what they can afford. The IBR plan does not serve as a replacement to a cap placed on interests since it cannot limit the total debt owed, yet it places a limit on the monthly loan payment – a significant factor that affects a person’s financial freedom and credit rating.

What America needs is a comprehensive state and federal reform that will thoroughly address the root cause of student debt, which is the rapidly increasing cost of going to college while providing a stable and affordable educational system for all students. After all, the country’s future depends largely on these students who are yet to make a massive contribution to the economic stability and progress of the nation, as long as they are given an access to quality education that they deserve to have.

Can you think of other practical solutions to issues that remain unaddressed by the student loan reform act? Please feel free to share your thoughts and opinions about this topic.


  1. G Swanson MBA 2 B PAID! says:

    Student loans should be like every other loan that you can refinance when market interest rates are low. If the borrower could control their loans by refinancing or doing balance transfers; then the loan servicing companies would be better at working with borrowers.

    Also these loan servicing companies should have a regulator agency to answer t, like the banking commission, they don’t so the borrower is at their mercy. If they do not report a payment the borrower has no real recourse to make them do what is right. The federal trade commission has little power over them.


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