On Monday, President Obama signed a new executive order intended to ease debt burdens for 5 million students.
The centerpiece of the initiative will allow students to cap their monthly payment of Federal direct student loans to 10 percent of their annual income under a program called “Pay As You Earn.” (PAYE) After 20 years of faithful payments, the government would forgive the remaining principal on the loans. Students who take a public service job after college – like being a teacher – would be granted principal forgiveness after 10 years.
The memorandum extends the terms of 2010 legislation that already allows most current borrowers to use PAYE to borrowers who took out Federal direct loans before 2007.
The rest of the order directs the departments of Education and Treasury to expand and improve outreach efforts to borrowers to ensure that they are aware of all of the tools they might have to manage their debt.
A fact sheet detailing the new policies can be found here.
The Department of Education needs to formally draft and revise the rules based on public comments before final implementation, so the plan will not come into effect until 2015.
During his comments on Monday, Obama also expressed support for Sen. Elizabeth Warren’s (D-Mass) proposal to allow some students to apply to refinance federal and some private education loans at lower rates available after Congress passed a 2013 law adjusting interest rates on federal student loans.