One of the biggest burdens that many college graduates face is their student loan debt. At the time the debt is incurred, it paves the way towards earning a degree that puts college students on the road to a career they love. Repayment does not begin until several months after graduation and, by that time, most college students assume they will be in a high paying job by then. Repaying student loans doesn’t appear to be as much of a financial burden at that point.
Recommended Reading: Trump's Loan Forgiveness for Students.
President Obama is working to alleviate the financial burden that many graduates feel as a result of their student loans. He has recently introduced the REPAYE student loan repayment plan that allows borrowers with Federal student loan debt to enroll in a repayment plan where the monthly payments are set according to their current income level. The plan generates lower monthly payment amounts that are easier for borrowers to pay back. In some cases, a borrower may receive a monthly payment of $0 based on their current income status.
Before 2015, the PAYE repayment loan program has only been available to student loan borrowers with loans starting in October 2007. President Obama has expanded this program to include any student loan borrowers with an account that began before that October 2007 period. These two repayment programs work to increase the opportunity student loan borrowers have to enroll in the best repayment plan that meets their needs.
Start Taking Advantage of It Now
Enrollment for both repayment programs began in December 2015. There are two ways for borrowers to enroll in these programs. Option one is to visit the Federal Student Aid website to learn more information and complete enrollment online. The second option is to contact current lenders and request placement into either program.
The changes that President Obama has made to the student loan repayment process allows borrowers to get out from underneath their debt more quickly. Upon making payments for 20 years, any remaining debt amount on a student loan account is forgiven. It does not matter how large that account balance may be; it will be erased.
Let’s Explain PAYE and What it Means
The Pay As You Earn, or PAYE, student loan repayment program allows student loan borrowers to make monthly payments that are based on their current income levels. The calculation takes a look at the discretionary income of a borrower and sets payment amounts at 10 percent of that income amount. For example, a borrower who has a monthly income of $1,200 would qualify for a student loan repayment amount of $120 per month for the next 20 years. After the final payment has been made, the remaining student loan debt amount is forgiven.
President Obama has made reforms to the PAYE program that work to provide a more efficient loan repayment period. Under his student loan reform plan, he adjusted the public service loan forgiveness program to allow for loan forgiveness to take place after just ten years of monthly payments by borrowers that work in the public service industry.
The President’s Loan Forgiveness Program
Under President Obama’s new student loan repayment plan, individuals considering pursuing a college degree can now do so without worrying about the financial burden they will face as a result of that decision. Federal student loans can now be given without the stress of trying to find a job upon graduation that will pay enough to satisfy high student loan amounts. In addition to this, students now have the peace of mind that, when repayment time comes, their monthly payments will be something they can easily afford.
The President’s loan forgiveness program offers two significant benefits to individuals that hold student loans upon their college graduation.
- Student Loan Debt Forgiveness - Reducing the repayment period from the actual life of the loan to just 240 payments before earning loan forgiveness reduces a substantial amount of debt that borrowers face. Payment must be made on time each month for the entire 240 month repayment period.
- The Introduction of PAYE Repayment Program - Limiting monthly payment amounts to only ten percent of a borrower’s monthly income significantly reduces the financial burden that many borrowers feel upon graduation.
While these two benefits may appear simple, each works to save student loan borrowers thousands of dollars when repaying their loans. It is a significant step in right direction towards alleviating the financial burden that those wishing to pursue a college education often carry with them throughout their life.
The New Plan Under President Obama
President Obama’s student loan repayment plans make significant changes to the Federal laws currently in place in regards to the requirements that allow for student loans to be forgiven. The previous plan stipulates that student loan forgiveness can only occur when a borrower makes 300 monthly payments on time for the full payment amount. It took place over a period of 25 years.
What Does PAYE Do?
The President’s PAYE student loan repayment program replaces existing Federal laws in regards to the amount of time a borrower must make repayments before forgiveness can occur. The PAYE repayment program restricts the payment period to only occur over 20 years with a payment amount that is flexible according to a borrower’s income level. The program erases the previously fixed monthly amount payments and replaces them with payment amounts that a borrower can more easily afford.
All monthly repayment amounts will be 10 percent of a borrower’s discretionary income. It is a small percentage reduction from the previous requirement basing monthly payment amounts on 15 percent of a borrower’s discretionary income. Although that five percent decrease may not seem significant, it makes a world of difference for a borrower who is struggling to make ends meet after making high student loan payments each month.
Only the following Federal student loans are eligible for the PAYE repayment program.
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS loans made to students
- Direct Consolidation Loans, exception on Direct or FEEL Plus loans issued to parents of students
Student loans that result from a private lender or a part of a parental loan for a student are not eligible for any PAYE repayment plan benefits. No additional assistance will be given as a result of this new program as well.
There are two considerations that a student loan borrower must meet to be eligible for the PAYE repayment plan.
- You must have a partial hardship that makes your total loan amount over a ten-year period higher than the total loan amount you would pay on a PAYE repayment plan.
- You must be a new borrower with a student loan that began on October 1, 2007. A loan starting before October 1, 2007, is not eligible for participation in the PAYE repayment program.
The Problem With Program Reforms
Having to meet the above eligibility requirements in order to participate in the new student loan reform program stands to eliminate a large portion of student loan borrowers. Many of these individuals have student loan accounts that began long before the October 1, 2007, requirement period. For an additional understanding of these eligibility criteria and how they apply to an individual situation, look at the following information:
- Definition of a New Borrower
A new borrower is defined as any individual that opened a direct student loan account on or after October 1, 2007. In addition to this, a borrower may not have any existing previous balance that is still due for another loan account or accounts that began before October 1, 2007.
- Definition of a Partial Financial Hardship
A partial financial hardship is defined as having higher monthly loan payment amounts under a standard ten-year repayment plan than the monthly loan payment amounts would be under a PAYE repayment plan. Under this definition, a borrower’s debt to income ratio is determined from only student loan payment amounts. Additional debts such as credit cards, car payments or mortgages are not taken into consideration.
All outstanding student loans that a borrower may have are taken into consideration when considering whether or not a hardship exists as well. Even loans such as FEE Program loans and others not eligible under a PAYE repayment plan factor into a partial hardship decision.
Obama Loan Forgiveness FAQs
There are numerous questions regarding President Obama’s student loan reform programs. Here are a few of the most frequently asked questions that focus on the program.
What is Obama Loan Forgiveness?
Obama loan forgiveness is a debt relief practice that absolves a borrower of any remaining student loan account balance upon making 20 years of on-time, monthly payments towards the outstanding balance.
There are several eligibility requirements that a student loan borrower must meet to be eligible for the PAYE repayment program.
- A borrower needs to have a Direct Federal loan and a guaranteed Federal Loan.
- A student loan must begin on or after October 1, 2007.
- At least one student loan must receive funding in 2011.
- A borrower must have student loans in good standing and not be in a default account status.
How Do You Apply For It?
The student loan forgiveness process happens automatically upon making the final payment in the required 20-year repayment period. As potential loans become available for forgiveness, a form may be created. That will not take place until approximately 2031. As of right now, no plan, outside of automatic forgiveness, is in place.
To apply for the PAYE repayment program, you can either contact the current lender of your student loan account or visit the federal student aid website to see if you qualify for the program. Upon meeting the requirements, you will need to fill out an Income Based/Pay As You Earn/Income-Contingent repayment plan request online at the Federal Student Aid website.
How Does Income Based Repayment Work?
Income-based repayment takes a look at your monthly discretionary income and sets a payment plan that is equal to ten percent of that income. For example, if your monthly discretionary income is $1,300 then your loan payment amount would be $130 each month.
Are Private Loans Covered?
As of right now, private student loans from private lending institutions are not able to receive coverage under the current terms of the PAYE repayment plan. President Obama has made indications that possible coverage for private loans could be forthcoming shortly.
Which Loans Are Eligible?
At present, there are only two basic student loan accounts that are eligible for participation in the PAYE repayment program. All direct student loan accounts are eligible. The only other student loan accounts receiving eligibility are those that began on or after October 1, 2007. Borrowers with either of these loan types must not have any existing balances on any other student loan accounts.
What Is Pay As You Earn?
Pay As You Earn is a student loan repayment program established by President Obama to alleviate the financial burden that many borrowers face as a result of their student loan accounts. It takes personal monthly discretionary income into account when determining the monthly payment amounts. That payment amount will never be more than ten percent of a borrower’s monthly discretionary income. It is a flexible amount that changes as the borrower’s income level changes.
Once a borrower has made 240 monthly payments on time, the remaining student loan account balance is forgiven. There are no additional payments to make towards a student loan once that occurs. Public service employees receive an added benefit from the program as their student loan forgiveness occurs after making monthly payments on time for ten years.
The Pay As You Earn repayment program is one of the best repayment options available for many borrowers. Having monthly payments that center upon their monthly income and being able to pay off those loans earlier means millions of student loan borrowers will become debt free much sooner than expected.
Should I Consolidate My Loans?
Loan consolidation should be considered if you have a direct Federal student loan and a guaranteed Federal student loan. When you consolidate these two loans into one account, you will receive a .25 percent decrease in your monthly payment amount. It may seem like a small amount now, but over the course of your loan repayment period it can significantly reduce the total amount that you owe on both loans.
Before you consolidate your loans, keep in mind that some loans will offer repayment advantages that are not applicable to other loans. If you are receiving a particular interest rate on one loan, that interest rate will not carry over into a consolidation situation. Take a look at all your repayment options before settling on loan consolidation.
Should I Sign Up For Automatic Payments?
Signing up for automatic payments can work to your advantage. You will receive a .25 percent reduction of your monthly payment amount as a sign of good faith effort by the government. The Federal Government views an automatic payment setup as a guarantee that your loan payments will arrive on time each month for the full amount due.
Does the New Plan Cap Student Loan Interest Rates?
A new proposal would cap student loan interest rates at 3.4 percent. It applies only to student loans that began before July 2012. Student loan accounts that start after this date are subject to the current interest rate on the market for the amount of the loan. The interest rate is only available for student loans issued by the Federal Government. Private lender accounts are not eligible.
Are Defaulted Loans Eligible?
No, any student loan account that has fallen into a default status is not eligible for the PAYE repayment plan. In the event your student loan accounts are now in a default status, you need to contact your lender as soon as possible to make payment arrangements that would bring your account to a current status. Likewise, if your student loan account is about to reach a default status, you need to contact your lender to see what options you have to prevent this from happening.
Reforming a Concept: Debt Relief for Students
President Obama is receiving positive recognition for making changes to the student loan debt situation. His student loan reform program works to reduce the financial burden that a college education places on those wishing to pursue a higher education upon high school graduation.
The reform program takes into consideration that many borrowers reside within the middle class of American citizens. For the first time ever, this class is showcasing student loan debt amounts that exceed credit card debt amounts. Having to pay down that student loan debt creates a financial hardship in many homes which, in turn, creates a problem within the economy as a whole. President Obama’s student loan reforms are working to change that fact.
$3.6 Billion in Student Loan Debt for Corinthian Colleges Forgiven
Corinthian College came under fire last year for overcharging students for tuition. As a result, many students took out student loans for amounts higher than what they needed. It affects students of the main Corinthian College campus as well as those that attended satellite campuses that were affiliated with the main campus on or after June 20, 2014. Students in attendance before that time are not eligible for the student loan forgiveness program.
The Obama Administration Publishes the ‘Student Aid Bill of Rights’
President Obama announced that student loan debt will receive protection under a new student aid bill of rights program. The program promises three things that are as follows.
- Establish a formal complaint system that borrowers can contact to file complaints about account loan lenders, debt collector practices and Department of Education Personnel.
- Makes student loan repayment easier by making changes to the current student loan forgiveness program and provide access to the Pay As You Earn program.
- Create a task force that focuses on problems relating to student loan debt and providing viable solutions to these problems.
The Effect Cromnibus Has on Obama’s Program
The approval of President Obama’s 2015 Federal Budget, Cromnibus, has a positive effect on his student loan repayment plans. The plan was met with much approval from the politicians in Washington and it appears to be a show of support in working towards reducing the financial burden that student loan debt places on those looking to pursue a college education.
Five Million More Borrowers Now Have Access to Obama’s PAYE
President Obama is removing the previous eligibility requirement of not allowing borrowers with student loan accounts before October 1, 2007, into the program. He is now making the program open to any borrower with a student loan account regardless of when that account began. Doing so widens the area of student loan borrowers who are eligible to take advantage of his PAYE repayment program.
Obama Supports Refinancing
President Obama is now showing support for the Bank on Students Emergency Loan Refinance Act that was introduced by Senator Elizabeth Warren. The act allows student loan account holders to refinance their loan amounts at a lower interest rate than they are currently paying. It works to reduce the monthly loan amount they will pay under a PAYE program as well as the overall amount of their student loan debt.
Obama’s Fiscal Year 2015 Budget Proposals
President Obama looks to make several adjustments to the student loan debt situation over the next year. Of the seven changes that are in the works, only three look to provide positive news for current student loan account holders. The remaining four will take some time to see exactly how the changes will work regarding student loan accounts.
Obama Student Loan Reforms Experience a Few Positive Changes
The President’s 2015 fiscal year plan produces three positive changes regarding student loan accounts. These changes are as follows.
- PAYE Will be Made Available to Everyone
Under the proposed changes, borrowers with student loan accounts before October 1, 2007, will be eligible for the repayment program. Monthly loan amounts will be held to only ten percent of a borrower’s monthly discretionary income. After making 240 payments, on time each month, the remaining student loan amount is forgiven.
- Loan Forgiveness Won’t Bring Tax Penalties
Student loan monthly payments include interest as well. Under this new plan, interest remaining on the account balance that is forgiven will be forgiven as well.
- Monthly Accrued Interest Will be Capped
The plan changes call for capping accrued interest at 50 percent of the amount owed. It may seem like a high-interest accrual, but there is currently no cap in place which makes the interest portion of a student loan debt outrageous.
Obama Student Loan Reforms Experience a Few Negative Changes
Every positive benefit typically brings, at least, one negative benefit along. The student loan reform program is no exception. Here are four potentially negative effects of the loan reform program.
- Borrowers With High Debt Won’t Get Forgiveness As Early
Student loan borrowers with at least $57,000 in Federal student loan debt will have to wait until their account repayment status reaches the 25-year payment mark before receiving debt forgiveness.
- PSLF Forgiveness Will be Capped at $57,000
Public service employees will now only be able to have the first $57,000 of student loan debt forgiven. Any amount in addition to this balance will still need to be paid.
- Only Income-Based Plan Payments Will Count Towards PSLF Forgiveness
Repayment made through one of the following methods are the only ones that make a PSLF student loan account eligible for debt forgiveness.
- Income-based repayment
- Income contingent repayment
- Income sensitive repayment
- Pay As You Earn repayment
- Married Borrowers Can’t Separate Income Anymore
A married couple may no longer file as ‘married filing separately’ to avoid higher loan repayment amounts. The couple’s income will be considered as one amount instead of two separate amounts coming into one household.
Obama is Not Forgiving Entire Loan Amount
President Obama’s student loan repayment program will not remove the entire amount of debt a borrower owes. It only works to reduce the monthly payment amount that a borrower needs to pay. After making 240 payments, the student loan is then forgiven.
Obama’s State of the Union 2014
In this speech, President Obama stated that anyone wishing to pursue a higher education should be able to do so without incurring a significant amount of debt. He is working on student loan reforms to address this issue.
Going After Excessive Student Loan Debt
CNN Money reports that in 2013, the average college student received $29,400 in student loan debt along with their diplomas. President Obama aims to provide financial relief to these and other graduates with his repayment plan. By reducing their student loan debt, borrowers should avoid defaulting on their loan or entering into bankruptcy.
What Student Loan Forgiveness Looked Like Before Obama’s 2012 Reforms
Before 2010, Federal laws stated that student loan debt would be forgiven after 25 years of a borrower making payments. President Obama made adjustments in 2010 that shortened the repayment period to 20 years. It does not take effect until some point in 2014.
New Debt Consolidation Options
President Obama’s administration determined that a majority of student loan account holders had a Direct Loan and a Federal Family Education loan that they were working to pay off at the same time. Restrictions preventing debt consolidations were lifted and students became eligible to consolidate all of their student loan accounts into a single payment every month. Upon consolidating their loans, borrowers receive up to a 0.50 percent interest payment reduction as well.
Debt Relief for Start-up Entrepreneurs
The US Small Business Administration joined forces with President Obama in offering student loan debt counseling to young entrepreneurs. The program aims to walk borrowers through the process of consolidating loan accounts and reducing monthly payment amounts.
The Young Entrepreneurs Council has established a Gen Y Fund with a $10,000,000 balance that will be utilized to help reduce the student loan debt of entrepreneurs that take part in their program.
Additional Public Service Benefits
Public service industry employees no longer have to wait for 20 years before having their student loan debt forgiven. President Obama has made adjustments that allow the debt forgiveness to happen after ten years of employment in a public service career.
There are several eligibility requirements that a borrower must meet to participate in the PAYE repayment program. These requirements are as follows.
- Federal student loans must have a start date on or after October 1, 2007.
- Student loans through private lenders are not eligible for the program.
- Salary-to-debt ratio conditions must meet IBR
- Student loans may not be in a default status.
- Student loans already in a repayment program are not eligible for this program.
President Obama’s “Know Before You Owe” Project
The Consumer Financial Protection Bureau and the Department of Education have joined forces to release a template guideline that will assist colleges and universities with presenting financial aid options to students. The project works to educate students on how financial aid works, how to determine the amount they need, and how to apply for their student loans. The information should help students form a plan for covering costs that may not be included in a student loan account.
President Obama’s student loan repayment plan is a great start to working on the student loan debt situation facing the country. Obtaining a college education is an expensive endeavor with payments for tuition, books and supplies, room and board, and normal living expenses all coming together to give someone a degree when everything is done. It has the potential to make someone question whether a college education is worth the cost. President Obama’s repayment plan is working to prevent that obstacle from stopping individuals from pursuing a college degree.