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Is Hillary Clinton’s Proposed Student Loan Refinancing Plan a Good Solution?

The US Presidential results are on the threshold of making history.

For the very first time, the United States of America may have a woman

President and that says a lot about the lady. Hillary Clinton’s policies are touted to improve the economic situation of the country. It is believed that the low income and mid income groups will benefit the most from her policies.

 

One of the most heartening economic reforms that Hillary Clinton has proposed is making college affordable to millions of Americans. The Student Loan Refinancing Plan is a much debated, discussed and written about issue in this presidential elections. There are several policy makers who believe that if this plan is well implemented, millions of future students can be debt free.

 

The student loan scenario is in dire straits and all governments, including Obama’s have been trying to alleviate the ailing student loan industry which is so fraud ridden. The biggest drawback is that anybody can apply for a student loan despite the projected income. In fact the industry is facing a situation similar to the housing market in 2000.

 

Before we delve deeper into the nuances of the plan and its impact on the American education society, here is a quick overview of the student loan industry and what student loan itself means.

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What is a Student Loan?

Student loan is the money a student borrows from a person, an institution or a bank for educational purposes; it has to be paid back with interest.  In the US, within six months of leaving college the students are expected to repay their loans or else they will be considered to be defaulting.

 

What are the various types of student loans?

The two most prominent student loans availed are:

  • Federal Loans – These are loans made by the federal government and typically the interest rate is lower than the other types of loans and has more flexible repayment options.
  • Private loans – These are loans made by banks or other financial institutions or private lenders with varying interest rates and additional charges. All private loans require a cosigner and should be your last resort.

 

In addition to that, there are a few other less common loan sources like:

  • Mortgage and home equity loans – Sometimes parents take a mortgage on their homes to pay for the college education. Invariably the interest rates are varied and the repayment schedule is longer. Taking home equity loan on the other hand will give you access to cash up front. Of course you risk losing your house if loan is not paid because your home is the collateral here.
  • Intra family loans – Probably an easy option because it involves very minimal or practically no paperwork and the interest rate will also be minimal. That said if you fail repayment then there is undue stress in family and even breakage of relations.

 

What are the different types of federal loans?

There are two major types of federal loan programs under the U.S. Department of Education:

  • Direct Loan Program:

This is by far the biggest loan program in the Education Department wherein the Department itself is the lender. This is further classified into:

    • Direct Subsidized Loans: These loans are specifically to those undergrads that are unable to pay for their higher education.
    • Direct Unsubsidized Loans: These loans are for all eligible undergraduates, graduates, and professional students. In this case their financial ability does not play any role in the loan process.
    • Direct PLUS Loans: These loans can be availed by the students and their parents as well. These are meant for those people who have no other form of financial aid.
    • Direct Consolidation Loans: In these loans you can combine all your federal loans into a single loan and hence incur only a single loan service.

This kind of loan is offered by individual schools for undergrads and graduates who are in dire need of help. Here the school itself acts as the lender.

The table below will give you a better idea about the difference between federal loans and student loans.

Federal Student Loans

Private Student Loans

·        You start paying only after leaving school

·        Lower interest rates.

·        Loans are subsidized and government pays at least half the interest while you are in school.

·        You don’t need to show a credit record.

·        No need for a cosigner.

·        Interest is tax deductible.

·        Loans can be consolidated into direct consolidation loan

·        You can defer payment temporarily.

·        There is no prepayment penalty.

·        You start paying when in school for most loans.

·        Variable interests as a result you may end up paying more.

·        No loans are subsidized and no one pays the interest for you.

·        You must show a good credit score.

·        Cosigner must in most cases.

·        Interest is not tax deductible.

·        Loans cannot be consolidated into direct consolidation loan.

·        You cannot defer payment.

·        There may be a prepayment penalty.

 

What are the various methods to pay off your student loans?

In the table below you can get a brief overview of the various ways to offset your loans.

Program

Qualification

Benefits

Income based Repayment (IBR)

Federal student loan borrowers

·        Payment is based on income and family size.

·        After 25 years the debt is forgiven.

Pay as you earn (PAYE)

All federal student loan borrowers

·        You pay only 10% of your monthly income as repayment each month.

·        Debt is forgiven after 20 years of regular repayment.

Public service loan forgiveness

·        All Public Service Workers

·        Consolidation loans under direct loan program

·        Full loan is forgiven after 10 years of timely repayment.

2 student loan forgiveness planHow to cope with student loans?

Often students feel overwhelmed with the student loan debt and feel inadequate and helpless. You can plan your financial situation better by opting for:

  • Consolidate Loans
  • Student Loan refinancing.

What is A Consolidate Loan?

When two or more educational loans are combined into one single loan, it is called a consolidate loan. As a result, instead of making multiple payments each month, you end up making just one payment.  Consolidating your loans will give you almost 30 years to clear the loan. The option of changing a variable interest rate to a fixed rate opens up too.

A point to note is that with increase in repayment time frame the number of payments also increases and automatically the overall money paid in interest. So before consolidating your loan make sure that the payment is not more than the current payments.

Let’s understand consolidated loans better.

Which loans can be consolidated?

Almost all federal loans that include the direct loans and the Perkins loans are eligible for consolidation. A point to note is that the private loans cannot be consolidated. If you default then there is a criterion which has to be met before you consolidate your loans.

Can parent plus loan be consolidated?

No, a parent plus cannot be consolidated because it was made by the parent and it cannot be transferred to the student.

What are the benefits of Consolidation?

There are no monetary benefits when you consolidate your loans but it makes things easier for you. You can easily keep track of payments each month as the numbers of bills are fewer and the payments are less.

What are the drawbacks of consolidation?

Consolidation comes with a few drawbacks like the original benefits, interest rate discounts and principal rebates which actually reduce the cost of the loan are lost.

What is a Student Loan Refinancing?

There are several financial institutions which offer refinancing solutions to help debt ridden students. Student loan refinancing is when you apply for a loan with new conditions and terms to clear your present student loans. It is another kind of loan though at lower interest rates; in fact the rates can be as low as 2.13%.

You can refinance either from the government or any private lending organization. Whichever be the case you should try to get an interest rate which is lower than the interest on your present loan.

What are the benefits of Refinancing?

You gain financially too when you refinance your loan because of the lower interest rate. The other benefits are:

  • Lower monthly payments
  • Reduces the loan term
  • You save money
  • One bill to keep track of.

In contrast to consolidation student loan, refinancing option is possible only with private lenders who refinance only private loans. Of course there are a few lenders who will refinance both federal and private loans helping you incorporate all your loans under one head.

Now that you have understood the how the student loan industry works, it is time to turn your attention to Mrs. Hillary Clinton’s Student Loan refinancing plan.  Her plan aims to create more number of jobs and spur the growth of startups. As seen from the recent market trends, lower startups mean lesser jobs for a vast majority of the populace. The market is still weak and needs a boost to revive itself which new businesses and entrepreneurs can give.

What are the key features of Hillary Clinton’s proposal?

With an idea to ease the financial burden on the future leaders, entrepreneurs and educationists of the country, Mrs. Clinton has proposed this student forgiveness program.  Let us look at the key features.

  • A 3-month reprieve from repayment: This period is provided to the borrowers to analyze their situation and find ways and means to refinance and consolidate their loans.
  • Increased refinancing options: Hillary believes that with newer options with lower interest rates at least 25 million borrowers will benefit as they have to pay low monthly payments.
  • Income based repayment plans: According to the plan the borrowers should pay only 10% of their monthly income as repayment for student loans and their debts should not run longer than 20 years.
  • Encouraging Employer cooperation: Clinton hopes that employers will pitch in with the repayment of loans. She believes they should assist their employees by introducing loan repayments benefits.
  • Moratorium for entrepreneurs: For budding entrepreneurs she wants to give a grace period of three years for them to consolidate their business before they start loan repayment.
  • Student loan forgiveness: Teachers and those participating in AmeriCorps programs are qualified for student loan forgiveness.

How is the plan beneficial?

If the forgiveness plan is implemented, than close to 25 million burrowers will be benefitted.  The lower interest rates will help a student save close to $1000 a year. The plan encompasses both the federal loan and private loan borrowers. Refinancing the student loans and merging all income driven plans into a single segment are the two key features of the plan.

  • Private students can avail forgiveness and protection available to federal loan borrowers and the federal loan borrowers can access low interest rates available to private loans.
  • The scheme is especially beneficial for student borrowers defrauded by Corinthian and other such educational institutes.
  • The accountability shifts to the student loan lenders in the plan. Mrs. Clinton plan will enforce the servicers to improve the ease of enrolling for loan, provide counselling, and assist delinquents.
  • The students who complete the AmeriCorps service plan will be eligible for student loan forgiveness.

 

What are the drawbacks of the plan?

The plan fails to highlight the tax bill after the end of the 20 year period. There is no mention of bankruptcy as a succor for borrowers. In addition to that there is no clarity on how the already marginalized sections will benefit from this plan.

 

Conclusion

The sheer size of the plan and the overall impact it will have on the American education system and its student loan industry only time will tell. Refinancing alone may not be the solution to the many woes of the American Student loan industry. The refinancing rates advertised now are only for the 5-10 year period and do not get to the 20 year mark. Hence, you should always weigh your options before you choose to refinance. For now, the idea to bind entrepreneurship and student loan forgiveness into one appears doable and if implemented right, the benefits to follow far outweigh the drawbacks.

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