What Obama’s student loan plan can offer your family

The cost of higher education in the States can be alleviated by the government - if you meet a very specific set of eligibility requirements.

You might need a Ph.D. to understand President Obama’s new plan to ease the pain of student loan borrowers.

Announced last week, the changes provide relief to millions shouldering student loans they cannot afford. But figuring out whether you are eligible requires a fair amount of homework.

Luckily, Your Money is here to make it simple.

If you have a private loan, you’re out of luck. This new plan is aimed at helping borrowers who have federal student loans. The loan must be taken out by the student, not the parent.

But if you have a federal loan that is either issued directly by the government, such as a Stafford Loan, or a bank loan backed by the government, you could be in the money.

Within the Obama plan, there are actually two groups of potential winners. The smaller of the two — 1.6 million borrowers — have the most to gain.

But there are parameters.

To be eligible for a new income-based plan, you must have taken out at least one loan no earlier than 2008 and you have to take out a new one in 2012 or later.

Generally, your total federal student loan would have to exceed your annual income for you to get a lift.

The rewards are nice: The plan improves on an existing program, reducing a current cap on monthly loan payments by a third, from 15% of discretionary income to 10%, and forgives any remaining debt in 20 years, instead of 25.

“It is a significant benefit,” said Mark Kantrowitz, publisher of Fastweb.com and Finaid.org. This is for someone who has a job, but it doesn t pay enough and is struggling to make loan payments. This will provide them with financial relief by reducing their loan payments to an affordable level.

For a second, much larger group, of student loan borrowers called split borrowers 5.8 million there could be advantages, too, but on a much smaller scale.

These are folks who have both federally guaranteed and direct student loans. They get to consolidate into one direct loan program and reduce their interest rate by up to half a percent.

Borrowers who are eligible will be contacted by their loan servicers early next year. You must consolidate by June 30, 2012.

For some, it may not be worth it.

The typical benefit will be $3 a month, Kantrowitz said. Some people may be better off keeping their loans out of this program. If you intend to accelerate the repayment of your loan, you may be better off keeping the loans separate.