What exactly is the “Obama Student Loan Forgiveness Program”?
“The Obama Student Loan Forgiveness Program” Is the colloquial nickname for a program known as the William D. Ford Direction Loan program.
Many people have only heard of this program under its nickname, which came about when President Obama reformed part of the Direct Loan program in 2009 in his Health Care and Education Reconciliation Act of 2010.
Remember, there are several different types of loans, and you unfortunately will not qualify for this particular forgiveness program if you have borrowed from a private loan servicer. Those who do qualify, however, would do well to read the following information.
Some of the changes implemented by President Obama are:
- Private lending institutions will no longer receive subsidies for federally backed loans.
- Starting in 2014, borrowers of new loans will make payments based on 10% of their discretionary income.
- New qualifying borrowers are also eligible for student loan forgiveness after 20 years instead of 25.
- Money will be used to fund poor and minority students, and increase overall funding for college education.
Benefits of The Obama Student Loan Forgiveness Program
There are many benefits to this program that a borrower can take advantage of. For example, the borrower has the ability to consolidate all their federal student loans into one new loan, and in that consolidated loan, the borrower is able to choose a repayment plan that is affordable.
The direct loan program is separated into five different repayment plans:
- Standard Repayment – The borrower is required to pay a fixed amount each month for the life of the loan. This payment is determined by your borrowed amount, interest rate, and term of the loan.
- Graduated Repayment – The borrower makes lower payments on this payment plan than they would on the standard repayment plan, but the payments gradually increase every two years.
- Income Contingent (ICR) – The borrower is required to make payments based on their income, family size, loan balance, and interest rate. Borrowers in this plan can theoretically have a payment as low as $0.00 per month, depending on their circumstances.
- Income Based Repayment (IBR) – Similar to the ICR, but in this case the borrower’s payment relies solely on their income and family size. In this case, the loan balance and interest rate are not calculated. The borrower is responsible to pay 15% of their discretionary income to their federal student loans. Borrowers in the IBR can also have a payment as low as $0.00 per month.
- Pay As You Earn (PAYE) – This plan typically has the lowest monthly payments. It is also based on a borrower’s income, but uses 10% of all discretionary income as a payment instead of the 15% that the IBR uses. Borrowers in the PAYE can have a payment as low as $0.00 per month, but qualifying is quite difficult.
For borrowers in the IBR, interest does not capitalize on the subsidized portion of their Direct Loan. However, this is applicable only for the first three years of your IBR payment, and only if your IBR payment is less than what would be due normally with interest. This can potentially add up to a fee of thousands of dollars, depending on your loan balance and what payment plans you personally qualify for.
In one example, a borrower owes $40,000 in subsidized loans, with an interest rate of 6.875%, and a 25-year term. This hypothetically borrower is single with no dependents, and has an adjusted gross income of $25,000 per year. In this case, interest on this loan would typically be $229.17 per month, but the borrower would qualify for an IBR payment of $93.69. As such, the borrower would be forgiven $229.17 – $93.69 = $135.48 of interest per month. Ultimately, should this borrower’s financial situation not change in three years, they would be forgiven a total of $4,877.28 ($135.48 x 36).
Student Loan Forgiveness At The End Of The Term
If you are enrolled in either the Income Contingent, Income Based, or Pay As You Earn repayment plan, you loan balance would be forgiven at the end of the term, should you still have a remaining balance. The term of this loan would be anywhere between 20 and 25 years, depending on which repayment plan you chose and the year you originally borrowed your loans. A few factors will be taken into account in order to make a decision regarding how much you will be forgiven: your original loan amount, how much you are earning, and how much your earnings fluctuate during your repayment term.
Consider a borrower who owes $85,000 in federal student loans with an interest rate of 6.875% and a 25-year term in the Income Based Repayment Plan. If this hypothetical borrower is earning $35,000 per year, and expects their income to stay the same for the term of the loan, they would qualify for an IBR payment of $218.69. If their income does not change over time, they could make these payments for 25 years in a total of 300 payments. The total amount the borrower would pay on this loan is 300 x $218.69 = $65,607 of the original $85,000 that was borrowed. They would qualify for $19,393 in student loan forgiveness after making the necessary qualifying payments. This does not include the interest that is being forgiven, though, as the debt would require the borrower to pay much more than the original debt.
Public Service Loan Forgiveness
Those who work in the public sector and wish to apply for public service loan forgiveness have a few options available to them. Payments made in the Direct Loan program in an IBR, ICR, or PAYE repayment count as qualifying payments for public sector workers, and in this type of forgiveness program, you could potentially qualify for forgiveness after only ten years or 120 payments instead of after 20 or 25 years, which is the typical term.
It is unfortunate that many people are not aware that they must be in the Direct Loan program and in one of the correct repayment plans to qualify for this program. This information is not widely publicized. Additionally, the public service loan forgiveness program is often mixed up with the more vague term “Obama Student Loan Forgiveness.”