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Paying off student debt is about to get easier for 5 million borrowers


The Obama administration rolled out two new rules Tuesday that will make it harder for schools to force students to use prepaid debit cards and give 5 million more college graduates the ability to enroll in income-based repayment plans.

It’s a lot to unpack from one announcement, so we’ll break it down for you:

More students can apply for income-based repayment

The Education Department officially unveiled its long-anticipated expansion of the income-based repayment program, Pay As You Earn (PAYE). The new plan goes into effect this December*. Nearly four million federal direct loan borrowers are enrolled in the current income-driven repayment plans.

The new version is called REPAYE (the “RE” stands for “revised”) and will allow 5 million more federal student loan borrowers to enroll. The new plan accomplishes this by letting borrowers sign up regardless of when they borrowed their loans or their debt-to-income ratio. The existing PAYE model is only available to people who borrowed after 2007 and whose debt greatly outweighs their income. Those enrolled in the REPAYE plan can have their payments capped at 10% of their income. Extending the program to an additional 5 million borrowers will cost the federal government an estimated $15.4 billion over the next 10 years.

“Allowing all borrowers to enroll regardless of when they borrowed or how much they owe will help more struggling borrowers better manage their payments, including those who dropped out of school with low balances and are among the most likely to default,” Lauren Asher, president of The Institute for College Access & Success (TICAS), said in a statement.

The new REPAYE plan goes into effect in December, which leaves doubt that student loan servicers will have enough time to bone up on the new regulations. Loan servicers have come under fire in the past for failing to properly inform borrowers about their income-based repayment options. Some student activist groups were critical of creating an entirely new repayment plan, which they say could potentially confuse borrowers even more.

“For some people, it might be better to switch over to the new REPAYE plan, but others might want to stay where they are,” says Karen McCarthy, senior policy analyst with the National Association of Student Financial Aid Administrators. “The answer will vary depending on what each eligible borrower wants.”

Another potential downside of the new plan: Borrowers with graduate school loans have to make 25 years worth of payments before they can qualify for loan forgiveness. Graduate school borrowers enrolled the existing PAYE plan are able to qualify for loan forgiveness after 20 years of payments. In addition to the new payment plan option, the department will now allow lump sum payments made on behalf of borrowers to count toward the 120 payments necessary to qualify for public service loan forgiveness. This rule applies to folks who may get loan assistance from programs like the Peace Corps or AmeriCorps.

No more shady prepaid debit card agreements:

The government has been trying to crack down on prepaid debit cards on college campuses for the last few years. The 2009 CARD Act stopped banks from marketing credit cards on campuses, among other things. And it worked pretty well – college credit card agreements dropped by more than half between 2009 and 2013.

But the ever-resilient banks simply shifted their focus from credit cards to prepaid debit cards. Today, 40% of students attend schools that have agreements with banks to market student debit and prepaid cards on campus, according to a report by the Government Accountability Office. The cards are marketed as a hassle-free way for students to access federal student aid refunds (an estimated $25 billion in Pell Grant and Direct Loan program funds are deposited onto prepaid debit cards each year). They can be a useful alternative for students who don’t have a bank account to get funds through direct deposit and would rather not deal with cashing a paper check.  

But the cards can come with many hidden fees, including overdraft fees and a charge each time they use a PIN during a transaction. In 2012, Higher One, a nonbank financial firm that holds 57% of the campus prepaid debit card market, paid $15 million to settle allegations of unfair and deceptive practices that resulted in consumers paying higher fees.

The new Department of Education rule requires schools to allow students to choose how to receive their student aid refunds. They can no longer be forced or urged to open a certain kind of account to get that money (last year the GAO also reported that some schools get kickbacks when students sign up for certain debit and prepaid card accounts). The rule says schools have to make sure fees aren’t “excessive and confusing,” but stops short of spelling out exactly what is considered excessive or confusing.

These regulations will help make sure student loan debt is affordable for all borrowers and bring overdue reforms to campus cards, a sector that too often puts taxpayer dollars and student consumers at risks,” soon-to-be outgoing Secretary of Education Arne Duncan said in a statement.

*Correction: An earlier version of this article mistakenly said the REPAYE program begins July 1, 2016. It begins December 2015. To enroll, visit www.StudentAid.gov/IDR or contact your loan servicer.

Mandi Woodruff is a reporter for Yahoo Finance and host of Brown Ambition, a weekly podcast about career and finance. Follow her on Tumblr or Facebook