Friday, July 10, 2009

ABA: Loan Forgiveness Coming

For all you law school hopefuls and grads, President Obama and Congress are going to help you:

Make sure you read the comments, which are usually the best part of an ABA Journal post. One person says the world doesn't need help getting more lawyers. He has a point.

I paid off all my student loans myself, but I suspect more than a few people game the system. For example, I've heard that some recent graduates had taken loans against their houses and used a home equity loan to pay off their student loans. Then, depending on the remaining value of the home and their state's exemptions, they may have been able to declare bankruptcy and still keep their home. There are probably other ways to game the system, but the way banks were giving out HELOCs, using your home was probably the easiest way.

Some people have suggested getting Perkins loans. When I was in law school, my financial aid advisor recommended that I maximize my Perkins loans, so every year, I'd go to the financial aid office and ask for more Perkins loans. From 1999 to 2002, Perkins loans had low interest rates and were therefore favored by many students; however, under the new "Competitive Loan Auction Pilot Program" terms, I've heard that Perkins loans are not entitled to any relief unless they are consolidated. (At least according to this Sunday's SJ Merc.) One thing's clear: more than ever, it's essential to talk with your financial counselor to make sure you know all your options. Make sure you do your due diligence.

For all you policy wonks, here is a link that leads to the text of the law itself. You'll notice that Dems sponsored the bill, and George Bush signed it. So why is President Obama getting credit for this "new" student loan relief? Because Section 701 recently gave his administration more power and discretion:

Section 701 -
Directs the Secretary to conduct a Competitive Loan Auction Pilot program, beginning in July 2009, under which biennial auctions are held in each state allowing prequalified lenders to compete for the exclusive right to make FFEL program PLUS loans at all IHEs within the state. Provides that the winning bids from each state auction shall be the two bids containing the lowest and the second lowest proposed special allowance payments requested from the Secretary. Requires the Secretary to guarantee 99% of the unpaid balance of such loans.
Basically, President Obama's appointee gets to set the terms for lenders who want to loan money to students. In exchange, eligible lenders get a guarantee that 99% of the unpaid balance of the loans issued under President Obama's rules get paid back, courtesy of the American taxpayer. Interesting, no? Congress passes a law in 2007 with provisions that "activate" in 2009 and thereafter until 2017.

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