Student loan initiatives could benefit 40M borrowers

Young money: The college catch 22
The college catch 22   

Student loan debt is still the $1.3 trillion gorilla in the room—one that borrowers could soon have more options to manage.

President Barack Obama announced a new "Student Aid Bill of Rights" Tuesday, directing the Department of Education and other federal agencies to undertake initiatives in three areas to help improve affordability for the estimated 40 million borrowers with federal loans. "We're going to require that the businesses that service your loans provide clear information about how much you owe, what your options are for repaying it, and if you're falling behind, help you get back in good standing with reasonable fees on a reasonable timeline," Obama said during his speech at the Georgia Institute of Technology Tuesday afternoon.

"We're trying to make sure that, across the board, more and more young people can afford to go to college," he said, "And then afterwards, that you're not so burdened with debt that you can't do anything else."

The combination of initiatives could be a boon to students struggling with their debt, said Mark Kantrowitz, senior vice president at Edvisors.com, a network of education resource sites. Graduates in the class of 2013 left college with an average $28,400 in loans, according to the Project on Student Loan Debt. And according to Department of Education figures from the third quarter of 2014, some 7 million borrowers are currently in default for loans totaling $98.1 billion. "If this all gets implemented, it'll certainly be a positive," said Kantrowitz.

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Many of the president's initiatives focus on repayment, both in setting affordable payments and helping struggling borrowers get back on (and stay on) track. Among other steps, the Department of Education will simplify the process to apply for income-based repayment, require loan contractors to apply prepayments to a borrower's highest-rate loans first, and set standards for student loan debt collections. Agencies may also recommend changes to how student loans are treated during bankruptcy proceedings. (Currently, they're difficult, though not impossible, to discharge.)

As another part of the initiative, the government will create a website where borrowers can submit feedback and complaints about federal student loan lenders and services, as well as collection agencies and colleges. Data collected through the website, slated to be created by July 2016, will be studied for possible sanctions as well as new laws and regulations, according to details released by the White House.

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While Obama's plan would help borrowers after the fact, Kantrowitz said initiatives should be stronger in educating students and parents before they take out those loans.

"[Students] still need to understand what they're signing," he said. "Borrow as little as you need to, and don't borrow just because you can."

A financial literacy class would help, as would personalized loan counseling that factors in not just a student's current financial situation but also what they might be expected to earn at graduation.

"Most young students and a lot of their parents don't really have a concept of how expensive that loan is over the term of payment," said Kevin Meehan, a certified financial planner based in Itasca, Illinois. Clearer detail there could help parents and students figure out which college is the right fit. Or even whether skipping the four-year degree in favor of alternatives like community college or training in a trade or specific skill are a better fit for that career path, he said.