President Obama’s student loan forgiveness program is fairly complex, but don’t feel bad if you struggle to understand everything about it. The most important thing to remember is that his program implemented changes to the previous federal loan forgiveness programs in order to forgive federally-funded student loans.
The President’s reforms will now make it easier for people to borrow money for college that they won’t have to worry about paying back after they have put in a certain number of months–regardless of how much debt has actually been paid off during that time.
The most important component of the President’s student loan forgiveness program was the introduction of the new student loan repayment plan called the “Pay As You Earn” (PAYE), an income-based repayment plan. This allows more people, regardless of financial status, to qualify for debt forgiveness.
This new repayment plan may remind you of something, and you’re right! It is fairly similar to the Income-Based Repayment Plan and Income-Contingent Repayment Plan. Both of these allow borrowers to set monthly student loan payments based on a percentage of their discretionary income.
These repayment plans are appealing to many graduates because they offer reassurance that even if you can’t find a good job immediately after you complete your education, your monthly student loan payments will reflect your lower income, and you won’t be expected to pay more than you can.
In the best case scenario, you could theoretically be enrolled in the PAYE plan and owe a whopping $100,000 in federal student loans, but only have a monthly payment of $0!
PRESIDENT OBAMA INCREASES ACCESS TO PAY AS YOU EARN
Last June, President Obama announced new changes to the federal student loan forgiveness program. One very important and valuable reform that was made is the Pay As You Earn Student Loan Repayment Plan, which is available to over five million additional borrowers.
The details of this objective include:
- The Pay As You Earn repayment program, long known for having an October 2007 registration deadline, will have its eligibility criteria significant relaxed, meaning that anyone with federal student loan debt will quality, regardless of their enrollment date
- Eligibility to enroll in the program will not open up until December 2015, so depending on your circumstances you may have to wait until the next cycle to apply
What is “Pay As You Earn”?
Strangely enough, the most negative aspect of President Obama’s student loan forgiveness program is that most people don’t even know it exists!
Unlike other programs like Obamacare, Pay As You Earn’s existence continues to be hidden by the general public, even though it is an incredibly valuable program.
Pay As You Earn is one of 7 Federal Student Loan Repayment Plans, and it is the newest. The program was first introduced as part of President Obama’s sweeping student loan reforms proposed in 2011, but it did not become official until 2012.
Borrowers on the Pay As You Earn repayment plan are lucky enough to receive considerable financial forgiveness. They are given a 10% cap on federal student loan repayments, which means that they could easily save thousands of dollars of their hard-earned discretionary income.
There is a downside to Pay As You Earn. Because it adds payments, it also extends the lifespan of the repayment period, making the total loan more expensive since interest has more time to accumulate additional debt.
However, borrowers can protect themselves from further debt by researching the specific details of Pay As You Earn. It also offers comprehensive student loan forgiveness once 20 full years of scheduled monthly payments have been made.
Additionally, workers in the public sector receive special benefits. Those graduates who are working for either the government or a nonprofit are offered student loan forgiveness after making just ten years’ worth of on-time payments.
Due to these particulars, this might not be the most universally appealing student loan repayment plan. It greatly depends on the specifics of every student’s specific situation. However, there is a certain demographic that it is popular with: those with excessive levels of student loan debt and no real hope to ever pay it off successfully. It considerably eases the stress of monthly payments for grads in this situation.
Obama Announces Support for Refinancing
In addition to implementing reforms and relaxing the limitations on Pay As You Earn, President Obama has also been vocal about his support for the Bank on Students Emergency Loan Refinance Act, first proposed by Massachusetts Democratic Senator Elizabeth Warren.
This act, should it pass, will ultimately change federal law to allow borrowers with government-backed student loans to refinance them at current interest rates. This is incredibly important because it will reduce monthly payments, similar to how PAYE does—but it will also reduce total outstanding debt.
Students who took out loans before interest rates plummeted will find this reform to be a particular comfort. This small but significant change could save them more than the PAYE plan would, and it would actually reduce their total debt.
While PAYE is a Band-Aid solution that only reduces monthly payments but ultimately increases total outstanding debt, this is a much more valuable reform. Keep an eye on it over the coming few months, and stay informed!
PRESIDENT OBAMA TO ANNOUNCE UPDATES TODAY
Media sources have provided information that suggests that President Obama will be announcing further updates to his student loan forgiveness program today.
An official in the White House has alerted the media that the updates will include the following:
- Expanding the eligibility criteria for the Pay As You Earn Student Loan Repayment Plan, which caps monthly student loan payments at just 10% of discretionary income
President Obama will also allegedly be promoting a recent proposal from Senator Elizabeth Warren. This proposals suggests that borrowers should be able to refinance their federal student loans.
The official announcement will come today at 10:45 AM, PST, and we’ll provide you with the latest updates as they are released.
Feel free to check back soon for more information.
Proposed Changes in the Fiscal Year 2015 Budget
It appears quite likely that President Obama’s student loan forgiveness plan will soon go through another series of significant changes. Some of these will be positive, while others will undoubtedly continue to worry borrowers who are already feeling overpowered by their student loan debt.
The Obama Administration’s proposed budget for the fiscal year of 2015 is set to make a total of seven major changes to the student loan debt reforms that the President initially introduced a few years back. Three of these alterations appear to be positive, while another four will undoubtedly not be popular amongst two specific groups: high-income borrowers and public service workers.
Should Congress approve of the budget and not alter any of its proposed reforms, the following changes will occur.
POSITIVE CHANGES TO THE OBAMA STUDENT LOAN REFORMS
Three of the following major positive changes will occur if Congress approves this objective, and they will make many borrowers very happy.
- Pay As You Earn Will Be Made Available to Everyone
For many years, the ever-popular Pay As You Earn Plan (PAYE) was typically only available to those borrowers who met very specific criteria, and everyone else was forced out by default. Now, thankfully, the Obama administration is attempting to relax these restrictions and make this program available to a wider range of students.
Currently, if your student loans are any older than October 1, 2007, the Income-Based Student Loan Repayment Plan (IBR) is the most affordable of the various Student Loan Repayment Plans available to you, capping your monthly student loan payments at 15% of discretionary income. However, much to many borrowers’ disappointment, PAYE is not currently available to anyone with older loans.
If the aforementioned reform to the program is approved, those borrowers with student loans older than October 1, 2007 could potentially be able to receive the benefits that PAYE offers.
If the Obama Administration’s 2015 budget is approved, borrowers will get the chance to enroll in the new Pay As You Earn Student Loan Repayment Plan. This plan has a lower cap for monthly payments: only 10%.
The difference of that small 5% can add up to a significant amount of savings each month. Additionally, PAYE will forgive your student loans after only 20 years, compared to IBR, which only provides forgiveness after 25.
In an economic climate where so many graduates today are seeking Federal Student Loan Debt Relief, these changes are highly significant.
In comparison to IBR, PAYE could increase the expense of your loans in the long run. This is important to keep in mind. Since your loan term will be extended and more interest will accumulate over the course of the loan, PAYE may not be the best option for everyone.
Please note that in spite of this, if you’re planning on making 20 years of payments and eventually receiving Federal Student Loan Forgiveness, then you’ll end up saving money from switching off IBR to PAYE in the long run.
- Loan Forgiveness Won’t Bring Tax Penalties
A great deal of federal student loan borrowers will be pleased to learn the details surrounding this particular improvement in the national fight against the current crippling Student Loan Debt Crisis.
Previous loan forgiveness programs such as IBR and PAYE have disappointed borrowers for several reasons. One of the biggest failures with these programs is the fact that forgiven debt is still considered taxable income. This sneaky catch to loan forgiveness has cost many borrowers thousands of dollars in additional taxes.
Those borrowers with Direct Subsidized or Unsubsidized student loans whose minimum payments aren’t high enough to cover interest charges each month are often hit the hardest in this situation. The eventual “forgiven” balance could end up being far higher than the amount of money they originally borrowed, which creates more problems than it solves.
It seems completely unfair to suggest that someone who pays off their debts for 25 years ultimately deserves to be ripped off in this way, but this is the way loan forgiveness programs deliberately mislead students.
If the 2015 budget forms do go through, whatever debt eventually gets forgiven won’t incur a tax penalty for borrowers. In our opinion, this is the biggest benefit and the most crucial reform to President Obama’s loan forgiveness program that could possibly be implemented. We are very excited to potentially watch this take place.
- Monthly Interest Accrual Will Be Capped
A huge problem for many borrowers is interest. When your payments aren’t high enough to cover the interest that’s accumulating on the loan, “interest capitalization” occurs.
Basically, this is the process the banks use to intentionally increase the long-term costs of loans. They do this by adding the accrued interest to the original principal of the loan, which can end up increasing the expense of the loan in the long run.
It’s due to this sneaky law that some hardworking, committed borrowers still get tricked. It’s completely possible that you could make your payments in full and on time each month, but still end up owing more money. Does this seem fair?
It’s particularly problematic for those borrowers with Unsubsidized Loans who have been relying on Federal Deferments or Forbearance Programs, because the government will not cover the costs of their monthly interest accrual while their loans are on pause. This means that borrowers might be receiving excellent temporary debt relief, which looks good at first glance-but their long-term debt obligations will be increased due to interest capitalization.
In the worst-case scenario, you could end up borrowing a small amount, such as $25,000, in student loans–and then find yourself straddled with $250,000 of debt in as little as 15 years.
It is good news, then, that President Obama’s 2015 budget includes a provision set to cap interest accrual at just 50%. When a borrower’s monthly payment isn’t enough to cover the accumulating interest, this cap could end up being a very significant improvement.
Even if 50% interest accrual sounds extreme, there are no caps in place whatsoever right now. So this is very pleasant news for anyone having trouble making their monthly payments, especially for those relying on Deferments and Forbearance programs.
NEGATIVE CHANGES TO THE OBAMA STUDENT LOAN REFORMS
The proposed fiscal year budget, despite its improvements, has its downsides as well. Unfortunately, some detrimental changes will be put into place alongside the positive ones. These problems will be particularly severe for those borrowers hoping to take advantage of President Obama’s recent student loan reforms. In many cases, these are graduates with an extremely high amount of debt, and those who are seeking forgiveness under the Public Service Loan Forgiveness Program.
If the new budget is approved, here are the negative changes that you will see.
- Borrowers With High Debt Won’t Get Forgiveness As Early
Anyone with more than $57,000 in federal student loan debt will be negatively affected by this proposed 2015 budget.
According to the budget, especially high borrowers won’t be able to receive loan forgiveness under PAYE at the new 20-year mark. Instead, they will have to wait 25 years before their debt is completely forgiven.
You might be wondering how those five years could potentially make such a huge impact, but when you consider that borrowers with loans over $57,000 are the people who need forgiveness the most, it doesn’t seem at all fair to suggest that they should be forced to repay their loans over a longer period of time.
Experts who work for the government and for watchdog agencies are claiming that this will help protect the long-term sustainability of the PAYE program and the other federal forgiveness programs currently in place. From our perspective, it seems less clear. Plenty of the government’s funding goes towards other programs besides student loan forgiveness.
If you feel that this change could affect you negatively, please don’t hesitate to call, write, or email your respective U.S. Representative or Senators to share your views. Your voice matters!
- PSLF Forgiveness Will Be Capped at $57,000
Those borrowers who are using services provided by the Public Service Loan Forgiveness Program will be greatly affected by this one. However, if you are not using this program, this change will not affect you whatsoever, thankfully.
The new 2015 budget will cause a dramatic reduction in the “windfall benefit” built into the PSLF program and President Obama’s loan forgiveness reforms.
Instead of forgiving up to 100% of your federally-funded student loan debt, PSLF will now only allow you to write off a certain amount of debt. It is capped off at $57,000, which is still a significant amount of money, admittedly.
Many borrowers will be satisfied with this change as their debt is not this high, but for borrowers with greater debt, this will not be a positive change at all. It gets worse when you consider that public sector workers are impacted the most.
Some recent information suggests that this change won’t apply retroactively to anyone already enrolled in PSLF, so it’s possible that if you’ve been working towards loan forgiveness already, you may be entered into the protection portion of the program. Ideally, you will be able to write off the remainder of your debt in the future.
If you have doubts about this, we would highly suggest contacting whatever politician represents you and express your concerns.
- Only Income-Based Plan Payments Will Count Towards PSLF Forgiveness
It appears that President Obama is unconcerned about public sector workers. The impact of PSLF forgiveness benefits will be significantly lessened should this change occur.
Currently, PSLF forgiveness kicks in automatically if a borrower has made “scheduled, full, on-time monthly payments” for 10 years, regardless of which student loan repayment plan they were made under. This allows for a fair bit of freedom.
Sadly, under the proposed 2015 budget, certain monthly payments will not count toward that 10 years’ wroth of payments. Those made under one of the income-driven plans (Income-Based Repayment, Income-Contingent Repayment, Income-Sensitive Repayment or the Pay as You Earn Plan) will count, but anything else will not.
As many borrowers began on the other plans, made months or years of payments under them, and then switched to one of the qualifying plans later on, this could be very disappointing to many people.
Once again, if these changes are implemented, they very likely won’t be applied retroactively. If you’ve been paying your debts off consistently, in full, and on time, you probably won’t have anything to worry about.
- Married Borrowers Can’t Separate Income Anymore
There are advantages to stating that you are married on your tax returns and filing separately. This is especially true when one member of the couple is the sole breadwinner and makes significantly more than the other.
Under either of these income-driven plans, filing your taxes together would ensure that your incomes were lumped together when calculating your monthly student loan payment. If you include your well-paid spouse’s earnings on your tax return, your monthly payments will undoubtedly increase, even if your income is low.
The new budget seems be making it more difficult for couples to file separately.
Should the budget be approved and put into action, you won’t be able to file yours and your spouse’s taxes separately. You won’t be able to protect yourself from skyrocketing monthly payments.
On the bright side, filing jointly will make you and your spouse eligible to claim the standard Student Loan Interest Tax Deduction. As of 2014, that means no more than $2,500 per year, so it isn’t much, and if your spouse makes over $50,000 a year, this deduction seems ridiculously small and insignificant.
An increase in monthly payments will be unavoidable for married couples should this budget be approved.
PRESIDENT OBAMA IS NOT FORGIVING 100% OF STUDENT LOANS
Many resources are exaggerating the influence of President Obama’s new student loan forgiveness plan, even stating that it will erase 100% of federal student loan debt nationwide. This is untrue, and very misleading.
This rumor began circulating when a fake news website joked about the matter, but many SEO marketers have noticed how easily it drives web traffic and are capitalizing off it.
President Obama has introduced a new cost-savings program for those with federal student loan debt that includes both loan forgiveness as well as a significant reduction in monthly payments, and these are both good things, but will they completely eliminate student loan debt? Of course not.
The details about the real plan are as follows.
THE STATE OF THE UNION SPEECH
President Obama’s student loan forgiveness plans are constantly in a state of evolution, but we do know that no major new updates were shared during his recent State of the Union address.
In fact, during his State of the Union speech delivered on January 28th, 2014, President Obama barely mentioned student loan debt at all, in spite of how great of a concern it is to many Americans.
Some media experts even suggested that his initial bold statements about the student loan forgiveness program may have been a bit premature, as he seemed to be backtracking a little during the State of the Union address—and indicating that he may not be able to implement such dramatic changes as he initially stated.
He said very clearly that he wishes to make higher education more accessible for every American, in spite of socio-economic background, but he did not mention specifics about how he planned to actually do this. Many political speeches as of late have skirted around the issue.
In any case, here is a comprehensive summary of the student loan reforms that President Obama previously announced. We also provide an expert analysis of what’s changing, who’s eligible to receive the benefits, and how to apply for the program.
Additional updates will be provided whenever the President offers more information, so please consider checking back regularly.
Attacking Excessive Student Loan Debt
President Obama’s student loan forgiveness program, for all its supposed faults, can still save you a lot of money.
The vast majority of students in the graduating class of 2014 will be saddled with a tremendous amount of student loan debt. A CNN Money article illustrates this, reported that the average student loan debt for college graduates in the United States now sits at $29,400.
A study by the Federal Reserve Bank of New York way back in 2012 revealed that even at that point, more than 10% of graduates owed more than $54,000 in student loans. 3% of them had accumulated more than $100,000 in debt.
These are very disturbing statistics. It is good news, then, that President Obama’s debt relief program offers relief to those struggling to pay off their excessive student loan debt. The program seeks to reduce their financial liability, allowing them to avoid falling into bankruptcy.
The main downside to the President’s program is the fact that only very few people will actually qualify for it. Restrictive eligibility guidelines are dashing many borrowers’ hopes of ever paying off their student loans.
TWO MAJOR BENEFITS OF OBAMA’S STUDENT LOAN REFORMS
President Obama’s plan for loan relief is extremely lucrative for those holding debt that was incurred within the restrictive eligibility window. Those who qualify will receive the following two major benefits:
- Student Loan Debt Forgiveness – After borrowers have made 240 payments over 20 full years that were complete, scheduled, and on time, whatever is left of their student loan debt will be forgiven entirely. It is important to note that the payment threshold is reduced even further to 120 payments for public service workers.
- Introduction of the “Pay As You Earn” Student Loan Repayment Plan – This plan limits monthly federal student loan payments to 10% of the borrowers discretionary income (defined as income above 150% of the poverty line for a borrower’s family size and location)
The total savings from these two simple reforms alone is estimated to be somewhere in the billions. Clearly, there are tremendous benefits for those who qualify.
PRESIDENT OBAMA’S STUDENT LOAN DEBT FORGIVENESS PLAN
Previous rules demanded that federal loans be forgiven after the borrower completed 300 full, on-time, scheduled payments across 25 years of payments, but the President’s new plan drops that restriction down to just 240 payments (20 years of payments), which will offer financial relief to many people.
Public service workers such as teachers, nurses, and military personnel will be pleased to note that the plan makes them eligible to have their outstanding balances forgiven after just 120 payments over a brief 10 years of payment.
PRESIDENT OBAMA’S “PAY AS YOU EARN” PLAN
The “Pay As You Earn” component of the President’s forgiveness plan is similar to income-based repayment, or income-contingent repayment, in that it caps your monthly student loan payments based on your income at the time.
“Pay As You Earn” adds to the list of existing Student Loan Repayment Programs, allowing you to schedule your loan term to last up to 20 years. It allows you to be flexible. If your income increases, your monthly payments do as well.
Those people with excessive student loan debt, low incomes, or fluctuating income levels will benefit from this, as the amount of their monthly student loan payments end up being flexible, rather than fixed. It eliminates a great deal of financial stress.
WHAT DOES PAY AS YOU EARN DO?
Previous federal student loan law capped monthly student loan repayments at 15% of discretionary income. It goes without saying that this was a severe disappointment to recent graduates, people with high debt-to-income ratios, and others who simply didn’t have enough money to put towards student loan debt payments while also surviving on a day-to-day basis and providing for themselves.
Under President Obama’s new “Pay As You Earn” student loan repayment plan, monthly student loan payments will now be capped at just 10% of discretionary income, which will come as a great relief to many, even though a 5% difference may not seem like a big deal. For someone who is struggling to afford food while also laboring under the weight of student loan debt, it could be highly significant.
Of course, no repayment plan can be perfect. There are certain restrictions on eligibility for the “Pay As You Earn” repayment plan. Only individuals with certain types of student loans will qualify, which is frustrating.
Do your research and figure out whether you are eligible. Here’s a list of the federal student loans that will qualify:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS loans made to students
- Direct Consolidation Loans, except for Direct or FEEL PLUS loans issued to parents of students
If you, like many students, received loans from a private lender, or that are part of some other federal program (like a PLUS loan issued to parents), then you won’t qualify for the benefit, and won’t receive any additional financial assistance from these reforms. This is bad news for many of us, as private lender loans are fairly common.
ELIGIBILITY RESTRICTIONS FOR THE PRESIDENT’S PLANS
There are two major eligibility considerations required to qualify for the Pay As You Earn plan. They are listed below:
- You must have a Partial Financial Hardship. This means that the amount you would be required to pay on your eligible federal student loans with the 10 year long Standard Repayment Plan must be higher than the monthly amount you would owe under Pay As You Earn.
- You must be a New Borrower as of October 1, 2007. This means that you must have taken out your Direct Loans on or after October 1, 2007. Any loans taken out before then will NOT qualify for the Pay As You Earn plan, so anyone with older loans is ineligible.
THE PROBLEM WITH PRESIDENT OBAMA’S REFORMS
As previously discussed, President Obama’s student loan reforms are riddled with subtle catches that mislead borrowers. Excessive eligibility restrictions will prevent many of our readers from qualifying for either the new Student Loan Forgiveness plan or the Pay As You Earn plan.
What does it mean to be a New Borrower? What is a Partial Financial Hardship defined as? We’ve provided a brief but thorough explanation below.
WHAT IS A “NEW BORROWER”?
To qualify for the benefits, you must meet the following conditions:
- You must count as a “New Borrower” on or after October 1, 2007
- Here’s the official definition of a “New Borrower” (from the Pay as You Earn fact sheet, which you can findhere)
“You are a new borrower if you had no outstanding balance on a Direct Loan or FEEL Program loan as of Oct. 1, 2007, or if you had no outstanding balance on a Direct Loan or FEEL Program loan when you received a new Direct Loan or FEEL Program loan on or after Oct. 1, 2007. In addition, you must have received a disbursement of a Direct Subsidized Loan, Direct Unsubsidized Loan, or Direct PLUS Loan for graduate or professional students on or after Oct. 1 2011, or you must have received a Direct Consolidation Loan based on an application that was received on or after Oct. 1, 2011.”
Confused? You’re not alone. We’ve summarized it for you below. Basically, this means that:
- Only those borrowers with Direct Loans that were taken out on or after October 1, 2007 will qualify for the Pay As You Earn program
- Your loans taken on or after October 1, 2007 will only qualify if you don’t have any existing Direct Loans or FEEL Program Loans still in repayment which were taken out before October 1, 2007
Obviously, this does not seem at all in line with President Obama’s talks about making higher education available to everyone. “Everyone” seems to mean only those who have borrowed since 2007. Of course, there are many Americans who have been paying it off their debt for decades but owe just as much or even more than they did when they first began paying it off.
Existing student loan debt is an issue for many people as well. Recent borrowers are far from the only ones who deserve a break. If only Congress would understand this!
WHAT IS A PARTIAL FINANCIAL HARDSHIP?
Having a “Partial Financial Hardship” is the other eligibility stipulation that even further restricts access to the Pay As You Earn repayment plan.
Not only do your loans need to have been taken out on or after October 1, 2007, but you also clearly need to be in a bad way financially. This is typically proven through your debt-to-income ratio, although only your student loan debt is calculated. No other debt, such as your mortgage or credit card debt, is relevant in this case.
The government defines a “Partial Financial Hardship” as:
… the monthly amount you would be required to pay on your eligible federal student loans under a 10-year Standard Repayment Plan is higher than the monthly amount you would be required to repay under Pay As You Earn.
If you’re struggling to make your monthly student loan payments, you’ll very likely qualify for this program. You’ll also get to factor in all Direct Loans that are eligible for Pay As You Earn, as well as some FEEL Program loans, even though none of those are eligible for the Pay As You Earn plan. This is a pretty significant financial break.
To find out if you are eligible for this portion of the plan, please visit the Federal Student Aid website and try out their handy “Repayment Estimator.”
FREQUENTLY ASKED QUESTIONS
The extremely restrictive eligibility guidelines explained above have made President Obama’s student loan forgiveness program controversial, to say the least. Many people are uncertain how it even works, due to misleading information on seemingly reputable webpages.
Uncertain whether you qualify for the program? Want to figure out how to apply to it? Interested in learning more about what the program actually offers? This FAQ section of the site has been created specifically with your questions in mind, and hopefully the following Q&As manage to put your mind at ease.
If you have further questions, you can leave a comment at the bottom of the page and we’ll do our best to get back to you.
WHAT IS LOAN FORGIVENESS?
In short, it is a complete cancellation of your debt.
Loan forgiveness is the best type of debt relief for many reasons, but mainly because since it involves cancelling a set amount of your debt without any need to spend any money out of pocket—unless, of course, you end up owing taxes on the forgiven amount.
The new loan forgiveness program proposed by President Obama is very exciting to many borrowers that have not been struggling to repay their debt. This is because the program allows you to completely stop paying off your loans after you’ve made 240 full, scheduled, on-time monthly repayments over 20 years of payments. As long as you’ve been consistent with your payments, whatever debt is left after those 240 payments is completely forgiven.
WHO QUALIFIES FOR THIS NEW PROGRAM?
Honestly? Not many people.
If you meet the following restrictive requirements, you qualify:
- You have both a direct federal loan and a guaranteed federal loan
- Both of your student loans were disbursed in 2008 or later
- At least one of your student loans was disbursed in 2011 or later
- Your student loans are not in default
HOW CAN I APPLY TO IT?
You are not able to apply for the loan forgiveness portion, but you can apply for the Pay As You Earn Plan.
The loan forgiveness component of the program has no application form to fill out yet. No one qualifies as of yet. The earliest anyone will be able to qualify for forgiveness is October 21, 2031.
For the Pay as You Earn Plan, the government recommends that you first contact your lender to ask them for specific details about your eligibility. After that, there is an online form you can fill out for the Income-Based (IBR)/Pay As You Earn/Income-Contingent (ICR) Repayment Plan Requests, which you can find here.
HOW DOES INCOME-BASED REPAYMENT WORK?
This may seem confusing initially, but it is actually very simple to understand.
IBR works by capping your student loan repayments at 10% of your discretionary monthly income. This refers to any income that’s above 150% of the poverty line for your family size and location.
To offer one example, a borrower whose discretionary income came out to be $100,000 a year would have to pay $833.33. Everyone’s situation is different, so you can figure out the math yourself by using the following formula:
- Your annual discretionary income / 12 months per year * .1 = your maximum monthly payment
ARE PRIVATE LOANS COVERED?
No, they are not.
President Obama does seem to be trying to get something done about reforming private student loan debt too, but currently, there is no protection or benefit available to those with exclusively private student loans.
If you have yet to apply for student loans but know that you will need them in the future, private lenders might seem tempting. Please reconsider borrowing from private lenders for the reason stated above. There are many more options for those who take out federal student loans.
However, we have some solutions for those of you struggling with private student loan debt. For more information check out this page.
WHAT LOANS ARE ELIGIBLE?
Considering how selective the program is, only a very select few people will actually get their loans forgiven in the long run.
This is true for two main reasons. One, only direct student loans are eligible, and two, only Direct student loans issued on or after October 1, 2011 are eligible.
Additionally, loans issued on or after 2011 won’t be eligible if you had existing Direct or FEEL Program loan debt that was still in repayment when your new loan was issued.
Because of these restrictive qualification guidelines, the vast majority of people with student loan debt will not be able to take advantage of this program.
SHOULD I CONSOLIDATE MY LOANS?
It really depends on your circumstances.
If you’ve got both a direct federal loan and a guaranteed federal loan, then consolidating them will allow you to receive a .25% decrease in your monthly payment. .25% might not seem very significant, but over the course of your loan, you will begin to see the benefits of this decrease.
Some loans come with specific debt relief programs of their own, making consolidation a bad option. In addition, some come with special interest rates, and others are eligible for cancellation and forgiveness programs. The .25% decrease might not be worth it, or it might be; it would be wise to prepare, do your research, and make an educated decision before taking the plunge and consolidating your loans.
SHOULD I SIGN UP FOR AUTOMATIC PAYMENTS?
The only thing we can say to this is a resounding “yes”! This is virtually always a good idea if you are capable of making your monthly payments without issue.
Anyone who signs up for automatic payments will also receive a .25% discount in monthly payments. This is a reward for proving to the federal government that you are responsible and willing to pay your debt in full each month.
For those of you in good financial standing at present, this is a great option.
DOES THE NEW PLAN CAP STUDENT LOAN INTEREST RATES?
Yes, it does propose capping interest rates for all federal student loans at just 3.4%, which is significantly lower than what you’d be paying if you borrowed from a private lender. You’d even pay more if you were borrowing money to purchase a home.
However, this interest rate cap is only applied to loans that were taken out before July 2012. If you’re seeking a loan now, this won’t be useful to you.
ARE DEFAULTED LOANS ELIGIBLE?
No, defaulted loans are unfortunately ineligible, and many of the debt relief programs available for federal student loans won’t even be accessible if your loan enters default.
If you’re already in default, consider contacting your lender and getting out of this situation.
But if you think you’re about to go into default, look into the many available student loan deferment programs to see if you can put your loan on pause while you save up funds so that you can avoid defaulting on the loan.
(The following content was written before February 5, 2014. Some information may be outdated.)
REFORMING STUDENT LOAN DEBT RELIEF
President Obama’s student loan forgiveness plan attacks the problem of excessive student loan debt from many angles. Many of his supporters have celebrated this, while many of his political opponents have taken issue with it for the same reasons.
The President stated that the reason he is prioritizing this issue is the fact that “Student loan debt has now surpassed credit card debt for the time ever… and when a big chunk of every paycheck goes towards student loans instead of being spend on other things, that’s not just tough for middle-class families, it’s painful for the economy and it’s harmful to our recovery because that money is not going to help businesses grow.”
EARLIER STUDENT LOAN FORGIVENESS
There used to be a provision under federal law stating that student loan debt incurred via federal loan programs would be completely forgiven after 25 years, but here’s the catch: hardly anyone even knew this provision existed. Thus, hardly anyone took advantage of its many benefits.
Back in 2010, President Obama and Congress passed a bill to help further reduce the burden on former students by reducing the complete debt forgiveness timeline to a period of 20 years. This change was originally set for 2014, but recently we have learned that under President Obama’s student loan forgiveness program, the timeline for complete debt forgiveness of federal student loans has been pushed up to 2012.
This has been a great relief to an estimated 1.6 million former students, all of whom require access to debt relief and financial freedom.
NEW DEBT CONSOLIDATION OPTIONS
One of the other major aspects of Obama’s new student loan forgiveness program is the reduction the confusion and logistical problems that student loan borrowers typically face.
According to a study by his administration, an estimated 5.8 million people were managing a Direct Loan (DL) and Federal Family Education Loan (FFEL) at the same time. They were often making separate payments to the different accounts, which made the process more difficult, more time-consuming, and more likely to lead to defaults.
Under President Obama’s changes, borrowers will now be able to consolidate their student loan debt into a single account, making a single monthly payment to a single lender for both loans.
In addition, the plan offered borrowers who used the previous debt consolidation option to receive up to a 0.5% reduction in their interest rates on qualifying loans. This has ensured significantly lower monthly payments. Many people will save up to thousands of dollars over the lifespan of those loans, which is very significant.
DEBT RELIEF FOR START-UP ENTREPRENEURS
In accordance with President Obama’s student loan forgiveness program, the U.S. Small Business Administration is participating in the White House-led Startup America initiative, which recognizes the benefit of small businesses and seeks to reward young, hardworking entrepreneurs with chances to get out of student loan debt faster.
Additionally, the Young Entrepreneur Council’s private sector Gen Y Fund had claimed to invest at least $10,000,000 in up to 100 startups headed by millennials. They promised to pay off the remaining federal student loan debt obligations for the same entrepreneurs over the next three years. For many young, ambitious graduates, this is a very exciting prospect, and one that motivates them to make their start-up dreams a reality.
ADDITIONAL PUBLIC SERVICE BENEFITS
One portion of President’s recent changes to student loan forgiveness has been suspiciously downplayed by the general media, and we can’t begin to understand why. It includes a provision that will reduce public service workers’ wait times before debt forgiveness kicks in.
Previously, graduates with federal student loan debt had to serve 20 years in public service positions before receiving forgiveness, but the new provision reduces that only 10 years are necessary. This means that many grads will be drawn towards public service jobs in greater numbers.
Obama’s student loan forgiveness program only applies to certain borrowers with eligible loans. Millions of Americans are struggling with crippling student loan debt, but not all of us will be able to qualify. In fact, many of us won’t.
Here’s the run-down that will help you figure out your own eligibility:
- Borrowers must have taken out their federal student loans after October 1, 2007
- Borrowers with exclusively private student loans do not qualify
- Borrowers must meet salary-to-debt ratio conditions as determined by the IBR calculator
- Loans cannot be in default
- Loans already in repayment are not eligible for these new benefits
PRESIDENT OBAMA’S “KNOW BEFORE YOU OWE” PROJECT
Many borrowers have told us that they were not aware of the difficulties they would face once they had graduated and needed to pay back their student loan debt, since higher education is marketed as a beneficial investment in one’s future. The President’s new plan is addressing this from an honest perspective.
Another majorly significant component of the new plan to reform student loan debt includes an earnest attempt to educate young students on the potential downfalls of taking out student loans in the first place.
The cleverly named “Know Before You Owe” project is a collaboration between the Consumer Financial Protection Bureau and the Department of Education. Recently, the project released a Financial Aid Shopping Sheet that included a draft model financial aid disclosure form to help colleges and universities present financial aid information in a clear and concise manner to their students, so no one is misled later on.
The goal of this new project is to teach students about financial aid before they apply for it, and to help them better compare aid packages offered by different institutions in both the public and private sectors.
The form honestly explains the total costs and all of the risks of the student loan, all before any student has enrolled in a program. This is groundbreaking, as many students go into higher education quite oblivious to the negative consequences they may face later on. Overall student loan debt costs, monthly student loan repayments after graduation, and any other costs not covered by the federal aid packages that the student qualifies for are presented factually with no misleading information.
Further information regarding the Know Before You Owe project can be found on the Consumer Financial Protection Bureau’s page here: Know Before You Owe.
Higher education has always been the ultimate goal for many Americans, and our society has pushed it for decades.
During your parents’ and grandparents’ generations, university degree programs provided consistent upward mobility for people of low economic status and allowed them to develop very satisfying and lucrative careers.
However, millenials are viewing college through a different lens. Excessive increases to college tuition rates, extreme increases in the costs of college textbooks, and a weakening economy have made the average college degree less of an advantage in recent years. This program will ideally make college appealing to students once again.
President Obama’s student loan forgiveness plan could cushion the blow against an impending financial disaster. How? Well, for one, it could prevent excessive debt from being racked up by future grads. For another, those who are already in overwhelming debt will be able to find a way out of their negative situation.
The student loan debt crisis is undeniably real and affecting millions of Americans right now. It’s unclear whether President Obama’s efforts will make a huge difference yet, and opinions continue to vary.
WHAT DO YOU THINK?
Both Democrats and Republicans have shared their perspectives on the student loan forgiveness program, but your view is important too. Do you think that it will provide effective relief to our current student loan debt crisis, or are the eligibility requirements too strict to make any real difference? Is Obama making the right choice by investing in college graduates’ futures, or are there more important policies he should be focusing his energy on right now?
Please reach out and share your perspective with us.