INCOME BASED REPAYMENT (IBR)
If you are struggling financially, you may qualify for income based payments. These payments can often equate to $0/month payments, and your loan will still be getting chipped away at while in this program.
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WHAT IS LOAN FORGIVENESS?
Officially known as the William D. Ford Direct Loan Program, the Obama Student Loan Forgiveness Program gained this nickname after President Obama in 2009, created reforms to the Direct Loan Program. However, the reforms only apply to federal loans. Some of the reforms made by Obama include:
- Starting in 2014, borrowers would qualify for payments based on 10% of their discretionary income
- Money would be used primarily to increase college funding, as well as, to fund minority and poor students
- Subsidies will no longer be given to private lenders by the federal government for federally backed loans
- New borrowers will qualify for loan forgiveness after 20 years of qualifying payments
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WHAT ARE THE BENEFITS OF THE OBAMA LOAN FORGIVENESS PROGRAM?
There are several benefits that borrowers can enjoy when it comes to the Obama Loan Forgiveness. Borrowers have the chance to consolidate all loans into one and take advantage of an affordable repayment plan. The Direct Loan Program offers several repayment plans including:
- Graduated Repayment: Payments are lower than the standard repayment plan. However, the payments increase every two years.
- Income Based (IBR): The payment plan is strictly based on a borrower’s income as well as the size of their family. Borrowers are expected to pay 15% of their discretionary income to the loans. Moreover, the borrowers can enjoy payments as low as $0/month.
- Standard Repayment: Borrowers pay a fixed amount every month for as long as it takes. The amount of payments made depends on the term of the loan, borrowed amount and the interest rate charged on the loan.
- Income Contingent (ICR): Payments made are based on the amount borrowed, interest rate, the income of the borrower, family size and loan balance. Like IBR, borrowers may benefit from payments as low as $0/month.
- Pay As You Earn (PAYE): This is the lowest monthly payment plan. Payments are based on yearly income and use 10% of one’s discretionary income, unlike the 15% used in IBR. Qualification for the PAYE program is more difficult compared to other payment plans.
- Revised Pay-As-You-Earn (“REPAYE”) Plan: This new income-driven plan may provide substantial relief to millions of federal loan borrowers who are currently ineligible for the Pay-As-You-Earn plan due to that plan’s strict eligibility requirements.
With the Obama Loans Forgiveness Program, Income Based Repayment doesn’t capitalize on the subsidized portion of one’s loan. This usually applies if the Income Based Repayment is less that what’s normally in interest and for the first three years of the Income Based Repayment. Depending on the payment plan as well as the loan balance, the amount can amount to thousands of dollars.
Consider a scenario where you owe $40,000 in loans payable in 25 years and at an interest rate of 6.875 percent. Considering your annual income is $25,000, you’d be required to pay $229.17 on a monthly basis. You, however, qualify for an IBR payment plan of $93.63. In such a case, you’d be forgiven $135.48 in interest every month. If your financial situation doesn’t change for three years, you’d be forgiven $4,877.28.
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LOAN FORGIVENESS AT THE END OF THE TERM
If you enroll for Pay As You Earn, Income Based or Income Contingent payment plans, the loan balance is forgiven at the end of the term should there be a remaining loan balance. Depending on when the loan was originally borrowed and your payment plan, the term of the loan might be 20-25 years. The amount forgiven depends on a number of factors, including your annual earnings, the amount of the original loan and fluctuation of your income during the term of the loan
PUBLIC SERVICE LOAN FORGIVENESS
Those working in the public sector may qualify for payments made in the Direct Loan Program in IBR, ICR and PAYE. Borrowers can only qualify for loan forgiveness after a period of 10 years, unlike the standard 20-25 years forgiveness. To qualify, you have to be in the Direct Loan Program and be in the appropriate payment plan
TEACHER AND DISABILITY FORGIVENESS
There are several other loan forgiveness programs that aren’t part of the Direct Loan Program. These are separate entities, which serve the physically challenged by offering complete discharge and teachers by offering a principal reduction for federal loans.