What exactly is the Obama Student Loan Forgiveness Program?
Well, what became known as the ‘Obama Student Loan Forgiveness Program’ is actually a nickname for the changes he made to the US government’s ‘Federal Direct Loan Program.’ The ‘Obama Student Loan Forgiveness’ is a program that’s officially named the ‘William D. Ford Direct Loan program’, but most people know this program only by its nickname.
This name was born when in 2010 President Obama was reforming several elements of the Federal Direct Loan program when he signed the Health Care and Education Reconciliation Act. Please bear in mind that this only refers to programs that include federal student loans. Students that have private loans can not benefit from the information presented here.
President Obama made (among others) the following changes:
- The federal government stopped giving subsidies to private lenders for loans that are federally backed.
- From 2014 on, new borrowers may qualify to repay loans based on 10 percent of their discretionary earnings.
- From 2014 on, the term after which new borrowers may qualify for student loan forgiveness is lowered from 25 to 20 years.
- Federal funds are used to support minority students and to increase funding of colleges.
Some benefits of the Obama Student Loan Forgiveness Program:
Borrowers can take advantage of quite a few benefits that are offered through these changes. Borrowers now can easily put their different student loans into just one new ‘consolidated loan’, and for these consolidated loans, borrowers can choose a much more affordable repayment plan.
Borrowers can choose from 5 repayment plans:
- Standard Repayment Plan: Borrowers pay a monthly fix amount for as long as there’s the loan. The monthly payment is determined by the borrowed amount, term of the loan, and interest rate.
- Graduated Repayment Plan: Borrowers can make monthly payments that are lower than under the Standard Repayment Plan, but every 2 years, their payments will increase gradually.
- Income Based Repayment (IBR) Plan: Here borrowers repay based on their income and the size of their family. The loan balance and interest rate will not be used to calculate their monthly payments. Borrowers need to repay 15 percent of their discretionary income, which implies that they can have monthly payments as low as $0.
- Income Contingent Repayment (ICR) Plan: Here, borrowers make payments that are based on their earnings, loan balance, family size, and interest rate. In the ICR Plan, they may also have monthly payments as low as $0.
- Pay As You Earn(PAYE) Plan: This option generally leads to the lowest monthly payments. It is also income-based but it is using 10 percent of the discretionary income for the payment (whereas in the IBR Plan this is 15 percent). It is a lot harder to qualify for this PAYE repayment plan. Within the PAYE Plan, borrowers may also have monthly payments as low as $0.
How to check how low your payment can be:
Interest Forgiveness – Within the Obama Student Loan Forgiveness Program, interest due in the IBR (the Income Based Repayment) Plan is not capitalizing on subsidized portions of Direct Loans. This is applying just for the first 3 (three) years of IBR payments, and only in case IBR payments are less than what be normally due in interest. Be aware that this may amount to several thousands of dollars. It all depends on loan balance and the type of payment borrowers currently are qualifying for.
To give you an example:
Suppose a borrower owes $41,000 in Subsidized Loans, the interest rate is 6.865%, there is a 25 year term, the borrower has a gross income of $24,900 per year, and is single. Now the interest due on his Subsidized Loan would under normal conditions be around $230 per month, but he qualifies for a monthly IBR payment of around $94. So the borrower will be forgiven $230 – $94 = $136 of monthly due interest. In case the borrower’s financial situation isn’t changing for 3 (three) years, this would mean that $136 x 36 = $4,896 would be forgiven.
End Of Term Student Loan Forgiveness – Borrowers who have signed up for the ICR (Income Contingent), IBR (Income Based), or PAYE (Pay As You Earn) Plans will see their loan balance (if there still is any) at the end of the term. This term could be between 20 and 25 years, and depend on the repayment plan that they choose, and the time they originally borrowed the loan. The amount of what will be forgiven depends on the original amount of the loan, the borrower’s income, and in what way the borrower’s income will fluctuate during the repayment term.
To give you an example:
Let’s assume that a borrower has a federal student loan of $86,000, a 6,865% interest rate on the loan, a 25-year term, signed up for the IBR (Income Based Repayment) Plan, earns $36,000 annually, and expects his earnings to be staying at that level for the loan’s term. The borrower qualifies (under IBR) for a monthly payment of around $219, and when indeed his income wouldn’t change over the years, he makes 300 monthly payments for the duration of the term (25 years x 12 months).
The borrower pays a total amount of 300 x $219 = $65,700 while the original loan was $86,000. The borrower thus qualifies for $21,300 in forgiveness when he has made the qualifying payments. Please note that the actual forgiveness is considerably higher as the total repayment doesn’t include any interest as well. Normally, the borrower would have to pay a lot more than just the original debt because of due interest.
These are just a few examples of benefits associated with the ‘Obama Student Loan Forgiveness Program’. In a next post we’ll take a closer look at things like ‘Public Service Loan Forgiveness’ and ‘Teacher & Disability Forgiveness’.