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Understanding Businesses

Basics of the Obama Student Loan Forgiveness Program

When President Obama tweaked some parts of the Direct Loan program in 2010 when he signed the Health Care and Education Reconciliation Act of 2010, he birthed the Obama Student Loan Forgiveness program. Note that all the programs only affect federal student loans and not private student loans.

The following are some of the changes President Obama implemented:

> Zero subsidies to private lending institutions for loans backed by the federal government

> 10% of borrowers’ discretionary income as payment for loans that started in 2014

> Eligibility for student loan forgiveness after 20 years instead of 25 years on qualifying payments

> Money to be used to increase college funding and subsidize poor and minority students
Repayment Plans

Borrowers are given the following repayment options under the Student Loan Forgiveness Obama program:

1. Standard Repayment

The borrower will pay a permanent amount every month month for the life of the loan. Payment will be based on you’re the borrowed amount and interest rate, as well as the term of the loan.

2. Graduated Repayment

The borrower can pay less than the standard repayment plan, but the total loan amount will slowly increase every two years.

3. Income Contingent(ICR)

The borrower can pay, depending on the size of their family and their income, the remaining loan balance, and the interest rate as per this plan option of the Student Loan Forgiveness Obama program.

4. Income Based(IBR)

Payment as per this Student Loan Forgiveness Obama plan is strictly based on the borrower’s family size and income, meaning interest rate and loan balance have no effect. Federal income loans will be paid with 15% of the borrower’s discretionary income.

5. Pay As You Earn(PAYE)

This Student Loan Forgiveness Obama plan often has the least monthly payment, and is based as well on income; however 10% of the borrower’s discretionary income will be paid instead of 15% in IBR. The catch is, qualifying rules for this plan are stricter than the others.

Interest Forgiveness

Under the Student Loan Forgiveness Obama program, interest in the IBR will be totally separate from the direct loan’s subsidized portion. Such rule, however, is only good for the first three years of the borrower’s IBR payment, and only if this payment does not exceed what is normally due as interest. Depending on what type of payment the borrower is qualified for, as well as on the loan balance, this amount can total to up to thousands of dollars.

End-of-Term Student Loan Forgiveness

If a borrower has a remaining balance by the end of the term under the Pay As You Earn, Income Contingent or Income Based plan, it will be automatically forgiven. The loan’s term ranges from 20-25 years, depending on which repayment plan was chosen, and when the loans were borrowed originally. The amount to be forgiven will depend on the original loan amount, the present income of the borrower, and the extent of variations of this income throughout the repayment term.