With the vast majority of the economy in many nations moving towards an information based system, the need for an advanced education has become greater than ever. Indeed, a good number of people now believe that a bachelor’s degree is the new high school diploma, and a master’s degree has in effect become the de facto ticket to a middle class income and lifestyle. This reality has motivated the newest generation to make getting a college education a priority, but the size and the weight of modern student loans has served to dampen this enthusiasm to some extent.
The good news is, many individuals within the U.S. government (including the President) now realize that the student loan system of old has become insupportable, and as a result a multitude of student loan relief programs have come into being in order to make life easier for those who choose to pursue a higher education. This article will take a closer look at this subject, and along the way it will shed some light on the so-called Obama Student Loan Forgiveness Program.
The William D. Ford Direct Loan Program
Much like the comprehensive healthcare program that has become known colloquially as “Obamacare”, the William D. Ford Direct Loan Program is the actual name of the program that many people have come to know as the Obama Student Loan Forgiveness Program. Regardless of the semantics that describe this program, it can and has had a real impact in terms of helping those who choose to get college educations to live their lives without having to bow to the potentially crushing pressures of decades of student loan payments.
This program came into being when U.S. President Barack Obama signed it into law the Health Care and Education Reconciliation Act of 2010. It is important to note that this program only applies to federally administered student loans, not privately acquired ones. Individuals that owe outstanding student loan balances to private lenders are usually not able to gain any benefits from the information that will be disseminated in the following paragraphs.
Some Major Alterations That Were Signed Into Law by President Obama
- Many borrowers that are new to the system will be eligible for forgiveness of their student loans within 20 years for qualifying payments, rather than the original 25 year repayment term.
- Individuals who take out new loans beginning in the year 2014 will be qualified to make loan payment that are based on just 10 percent of their discretionary income.
- Some of the funds will be earmarked to help minority and low income students, as well as increasing overall funding for colleges and universities.
- The U.S. government will cease to provide private lenders with subsidies for loans that are backed by the government.
What are Some of the Benefits That the Obama Student Loan Forgiveness Program Provides?
The The William D. Ford Direct Loan Program provides many benefits for the average student loan recipient. For starters, borrowers will now be allowed to repackage all of their federally backed student loans into a single new loan. Once this step has been taken, borrowers will now be eligible to select a loan repayment plan that takes their income and personal circumstances into consideration.
Five separate repayment plans are now offered by the direct loan program. These include:
- Standard Repayment Terms. In this plan, the borrower agrees to repay a fixed amount during each month of the loan period. The payment amount is decided by factors that include the interest rate, loan term, and the overall loan amount.
- Graduated Repayment Terms. With this plan, the borrowers would be responsible for payments that are lower than those required by the Standard plan, but the payment amount would increase gradually every two years.
- Income Contingent (ICR) This repayment plan allows borrowers to make loan payment that are based on the size of their family, income level, interest rate, and loan balance. Certain borrowers that qualify for this plan may sometimes have monthly payments as low as $0.00 a month.
- Income Based (IBR) This repayment plan bases monthly payment on the family size and income of the borrower. The interest rate and loan balance are not taken into account when the monthly payment amount is calculated. 15 percent of the discretionary income of the borrower would be the payment amount, but IBR qualified individuals may sometimes have payments as low as $0.00 a month.
- Pay As You Earn (PAYE). The PAYE plan often requires the lowest monthly payment of all, and is income based as 10 percent of discretionary income rather than 15 percent. That said, it can also be harder to qualify for the PAYE plan than other repayment plans. PAYE members are also able to have monthly payments as low as $0.00.
Forgiveness of Interest
The Obama Student Loan Forgiveness Program doesn’t capitalize on interest in the subsidized portion of the Direct Loan for those in the Income Based classification. It’s important to note that this break only applies for the initial three year period of the loan, and also only if the IBR payment is smaller than the normal interest amount.
For example, take a borrower with a term of 25 years, an interest rate of 6.875%, and $40,000 in subsidized loans. The individual has an adjusted gross income of $25,000 a year and is single. While the normal interest payment would normally be about $229.17 a month, the IBR would pay about $93.69 a month. This means that the borrower would only have to pay about $135.48 per month, and over a three year period this could amount to about $4,877.28 in loan forgiveness.
End of Term Student Loan Forgiveness
Individuals that have enrolled in the Pay as You Earn, Income Based, or Income Contingent plans are eligible to have their loan balance forgiven at the end of the loan term if any cash is still outstanding. The loan term would generally run from 20-25 years contingent upon which plan is chosen. The ultimate forgiveness amount will depend on earnings, earnings fluctuations, and the original amount of the loan.
For example, take a borrower with a 25 year term, an interest rate of 6.875 percent, and $85,000 in outstanding loans. The borrower is bringing in around $35,000 per annum, and expects to be making the same amount for the entire loan term. Based on those numbers, the borrower would qualify for IBR payments of $218.69 a month for 300 months. At this rate, the borrower would end up repaying $300x$218.69, which comes to $65,607 out of the original $85,000. This represents about $19,393 in loan forgiveness after making the necessary payments.
