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Students need all the debt relief they can get

Tens of thousands of Marylanders could benefit from two initiatives by the Obama administration that are designed to ease the burden of federal student loans.

Under one, borrowers with low pay and high education debt could see a big drop in their monthly loan payments starting next year. The other nudges borrowers to consolidate certain federal loans, and also offers a small reduction in their interest rate for doing so.

Some criticize the White House for failing to provide more relief to students overwhelmed by loans, particularly private student loans. But grand measures to help student borrowers are out of the question given the gridlock in Washington. And student borrowers need every bit of help they can get.

The Project on Student Debt last week issued a state-by-state report on loans carried by those who graduated last year from public and private four-year colleges. The two-thirds of the Class of 2010 carrying student debt owed an average of $25,250 in federal and private loans, up 5 percent from the previous class.

In Maryland, the report said, 54 percent of students graduated last year with an average of $21,750 in loans. New Hampshire, where 74 percent of students had loans, led the pack with an average of $31,048 in loans.

Students with steep debt and meager pay should keep their eyes peeled for changes next year to the federal Income-Based Repayment Plan. The plan, available since 2009, caps monthly payments so loans don't eat up all your paycheck.

Right now, borrowers' monthly payments can't exceed 15 percent of discretionary income. Any balance remaining after 25 years will be forgiven.

The repayment plan was set to become even more generous in 2014, but the White House is accelerating these changes starting next year for certain borrowers. Monthly payments will be no more than 10 percent of discretionary income, and any money still owed after 20 years will be wiped out.

The federal government estimates that 1.6 million borrowers — including more than 23,000 Marylanders — would be eligible for these more favorable terms.

Pauline Abernathy, a vice president of the Institute for College Access & Success, says eligible borrowers could see their monthly payments fall by "hundreds of dollars a month or even to zero if they have no income or very low income."

Borrowers always had to qualify for the repayment plan, and there are added requirements to receive these more generous terms. For instance, loans made before 2008 won't qualify and borrowers must have at least one federal loan made in 2012.

That means the neediest — borrowers who graduated in the last few years and haven't found work or who are underemployed — won't be eligible for these more lenient repayment terms, even though they need them, says Mark Kantrowitz, publisher of FinAid.org, an online provider of aid information.

The White House also is encouraging borrowers to consolidate different federal loans. Borrowers now can have some loans from banks under the Federal Family Education Loan program, with others coming directly from the federal government.

The administration wants borrowers with both types of loans to consolidate them into a single loan under the government's direct lending program. And it will offer an interest rate reduction to those who do so.

Borrowers will be able to get a 0.25 percent interest rate reduction on an FFEL loan at the time of consolidation. For most, Kantrowitz says, this will work out to be a savings of $3 or $4 per month.

Make automatic debit payments and you can get another 0.25 percent reduction on your interest rate. Most borrowers already make automatic payments and have already received a quarter-point reduction, Kantrowitz says.

About 5.8 million borrowers — including more than 56,000 in Maryland — have a mix of direct lending and FFEL loans.

The White House says by consolidating debt into one loan, borrowers will be better able to track their payments and avoid default.

But this also saves the government money because it will no longer have to pay banks a subsidy for the FFEL loans. This savings, Kantrowitz says, will cover the cost of the interest rate reductions and the income-based repayment plan changes.

The special consolidation program will run from January through June. The Education Department says it will contact eligible borrowers.

eileen.ambrose@baltsun.com

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