New Student Loan Law Provides Welcome Relief

27 Sep New Student Loan Law Provides Welcome Relief

Student Loan debt has risen almost geometrically over the past decade or so. Illustrative of this fact is a statistic that tells us that private student loan debt rose 734% to $14 billion between 1994 and 2004. Student loans can present a vexing problem in bankruptcy, particularly in Chapter 13 cases where debtors are prevented from paying student loans as a “specially classified debt”. I would encourage readers to review the many Bankruptcy Law Network posts on the problem presented by student loans in bankruptcy cases.

However vexing is the issue of student loans in bankruptcy, an exciting new law signed by President Bush today provides several key changes to the way in which student loan debt is handled. What’s even better is that the law, which provides subsidies of approximately $20 billion to certain classes of student loan debtors, does not require any new tax-payer funding for its operation; rather, its funding is being borrowed from some of the financial incentives which have been offered to lenders of student loans in recent years.

The law is called the “College Cost Reduction and Access Act of 2007“. What follows is an outline of the law’s benefits:

  • For Pell Grants, the current ceiling of $4310 per student will increase to $4900 for the 2008-2009 school year and will max out at $5400 by 2012-2013.
  • Federally subsidized loans will enjoy reduced interest rates. The reduction will commence in July of 2008, when the rate will go from 6.8% to 6%. By July 1, 2011, interest rates will have been reduced to 3.4%.
  • This one presents a huge benefit and even applies to old, existing loans: required payments will receive a cap based on the debtor’s annual income. My understanding is that the cap is in the neighborhood of 15%, based on a report I heard today on CNN.
  • As a nod to the growing chorus that we need to be able to attract top teaching talent to our public schools, students in the undergraduate and graduate levels who make a commitment to teaching in public school will be eligible for annual tuition assistance of $4000.
  • Nurses, firefighters, police officers and other “public service workers“, i.e., employees of government agencies and non-profit organizations, will have their student loans forgiven after ten years of public service. This applies to loans which are closed on or after October 1, 2007.
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