Student Loan Change Comes On Little Cat Feet

Despite misperceptions, borrowers won't be able to convert private student loans to Federal Direct ones.

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Even though it's mailbag week, we would be remiss not to mention that the Obama administration recently announced important new initiatives that will help student loan borrowers. (Yes, we know, it's not FDR at Madison Square Garden.)

We will have a lot more in next week's blog on the proposals to accelerate changes to Income-Based Repayment (briefly, new borrowers in 2012 will benefit from a lower monthly payment cap and loan forgiveness after 20 rather than 25 years) and to encourage borrowers to convert federally guaranteed loans disbursed by private banks (FFEL loans) to Federal Direct Loans.

[Read more about Obama's new student loan rules.]

We also want to take the time to clear up one misperception: We've already been hearing from people who are mistaking FFEL loans for private commercial loans. So just to be clear, these new initiatives will not allow you to your convert private loans to Federal Direct loans. And, yes, your private loans will still lack the consumer protections provided by federal loans and will not be dischargeable in bankruptcy. We know—not what you were hoping to hear.

From the mailbag, we have some excellent questions on Income-Based Repayment (IBR) and Public Service Loan Forgiveness (PSLF). As you know, you are unique and so is your financial situation. As a result, our responses are not meant to provide specific legal or financial advice and we encourage you to reflect carefully on your options and to consult a financial adviser.

[See some frequently asked questions about private student loans.]

Dear Student Loan Ranger: I have two questions about PSLF and I was given your contact information by our law school's public service office. Would one have to start over again with the 120 consecutive payments required to earn loan forgiveness if one is unemployed for a period of time and then finds work again in public service? Can one ever be disqualified from PSLF based on income level (especially with government positions) thus effectively making one responsible for what would have otherwise be forgiven? —Joshua

Dear Joshua: Those are great questions especially in today's economy. First, the 120 payments required to earn public service loan forgiveness do not need to be consecutive. If one leaves qualifying employment for any reason (e.g., one becomes unemployed, takes a private-sector job, or goes on leave) any loan payments made during this period will not count toward forgiveness.

[Get more answers about public service loan forgiveness.]

But once one returns to qualifying employment, one's payments will pick up where one left off (assuming one still meets all the other requirements such as being in a qualifying repayment plan). For example, if one left qualifying employment after making 24 repayments, once one returned to qualifying employment, one's next qualifying payment would be No. 25.

Second, PSLF does not have an income cap disqualifying one from earning forgiveness. We should note, however, that one's income is a factor in determining how much one will pay under IBR. (IBR is generally the best repayment plan for almost everyone who is working to earn loan forgiveness.) So one's increased income may result in less to forgive due to the increase in monthly payments, but it will not disqualify one from that forgiveness.

Dear Student Loan Ranger: What is the website that has the IBR application? —Aaron

Dear Aaron: Short and to the point. That is the way we like our questions.

Unfortunately, there is no one website with an IBR application. You will need to contact your loan servicer (the company that is billing you) to request to switch into IBR if you are already in repayment. If you are not yet in repayment, your repayment selection form should have an option to select IBR. If it does not, call your servicer and request to be placed into IBR.

If you are consolidating your loans into the Federal Direct program (in which case you should consult www.loanconsolidation.ed.gov/) you may choose IBR as your repayment plan on the selection form during the consolidation process. But remember, if you are in repayment, payments due on your loans will continue to be due as usual during the consolidation process.

Dear Student Loan Ranger: I am attending your upcoming webinar and I have a question I hope you can address. I am a recent law graduate and I am going to take the bar in February. I am wondering if I can find loan forgiveness programs that are suitable for me since I am not an attorney yet. —Sherry

Dear Sherry: Good luck with the bar exam! IBR and PSLF apply whether you are, are not, or are not yet but are soon to be an attorney so we're glad you registered. See you in the webinar this afternoon!

[See U.S. News's rankings of the Best Law Firms.]

That's it for this month. To get all your questions answered, register for our next webinar on Friday, November 4 from 3 to 4 p.m. EST. And if you haven't already, make sure you follow us on Twitter @EJW_org (use #studentdebthelp) and visit us on Facebook to get all the latest educational debt information.

Isaac Bowers is the senior program manager for Educational Debt Relief and Outreach at Equal Justice Works. He was previously an attorney at Shute, Mihaly & Weinberger LLP in San Francisco, where he focused on environmental, land use, and planning issues. A graduate of the New York University School of Law, Bowers also has extensive experience in nonprofit advocacy and outreach.