Practical and Helpful Tips: Loans

Basics of the Obama Student Loan Forgiveness Program

As President Obama modified a portion of the 2010 Direct Loan program upon signing the Health Care and Education Reconciliation Act of 2010, he gave rise to the Obama Student Loan Forgiveness program. It’s important to remember that all the programs only cover federal and not private student loan borrowers.

The following are some of the changes President Obama implemented:

> No more subsidies given to private lending institutions for federally supported loans

> 10% of borrowers’ discretionary income to be paid for loans that began in 2014

> Student loan forgiveness eligibility period reduced from 25 years to 20 years on qualifying payments

> Money to be spent on poor and minority student funding and boost college funding
Repayment Plans

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

1. Standard Repayment

The borrower pays a fixed amount monthly for the entire life of the loan. Payment will be computed based on the amount of money borrowed, the interest rate, and the loan term.

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)

Payments will be computed based on the borrower’s income and family size, the outstanding loan balance, and interest rate under this Student Loan Forgiveness Obama plan option.

4. Income Based(IBR)

Payment under this Student Loan Forgiveness Obama plan is exclusively based on the borrower’s income and family size, which indicates that interest rate and loan balance will 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, this repayment plan follows stricter qualifying rules than the rest.

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

Under the Income Based, Pay As You Earn and Income Contingent repayment plans, any remaining balance at the end of the term would be forgiven. The term of the loan goes between 20 to 25 years, depending on the original date of the loan and the repayment plan selected. 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.