The Obama Student Loan Forgiveness Program Is a Nickname for The Federal Direct Loan Program
The name “Obama Student Loan Forgiveness” has become the nickname for a program actually called the William D. Ford Direct Loan program. Many people only know about the program, and have heard of it through others as the Obama Student Loan Forgiveness program. The name came about when President Obama reformed part of the Direct Loan program in 2010 by signing the Health Care and Education Reconciliation Act of 2010. Its important to keep in mind all the programs are offered for federal student loans. Private loan borrowers are not able to benefit from any of the below information.
Here are some of the changes that were made by President Obama.
- The federal government will no longer give subsidies to private lending institutions for federally backed loans.
- Borrowers of new loans starting in 2014 will qualify to make payments based on 10% of their discretionary income.
- New borrowers would also be eligible for student loan forgiveness after 20 years instead of 25 on qualifying payments.
- Money will be used to fund poor and minority students and increase college funding
So What Are The Benefits of The Obama Student Loan Forgiveness Program
The direct loan program offers five different repayment plans:
- Standard Repayment – The borrower will pay a fix amount each month for the life of the loan. The payment would be determined by your borrowed amount, interest rate, and term of the loan.
- Graduated Repayment – The borrower would make payments lower than the standard repayment plan, but would gradually increase every two years.
- Income Contingent(ICR) – In this plan, the borrower would make payments based on their income, family size, loan balance, and interest rate.Borrowers in the ICR can have a payment as low as $0.00/mo
- Income Based(IBR) – This plan bases the borrowers payment strictly on their income and family size. The balance of the loan and interest rate are not used in calculating the monthly payment. The borrower would be responsible to pay 15% of their discretionary income to their federal student loans. Borrowers in the IBR can have a payment as low as $0.00/mo
- Pay As You Earn(PAYE) – This plan usually has the lowest monthly payment, and is also based on your income but uses 10% of your discretionary income as a payment instead of the 15% used in IBR. Qualifying for the PAYE repayment plan is more difficult than the others. Borrowers in the PAYE can have a payment as low as $0.00/mo
In the Obama Student Loan Forgiveness program, interest in the IBR does not capitalize on the subsidized portion of your Direct Loan. This applies only for the first three years of your IBR payment, and only if your IBR payment is less than what is normally due in interest. This can amount to many thousands of dollars depending on your loan balance and what type of payment you currently qualify for.
Example: Borrower owes $40, 000 in Subsidized loans. The interest rate is 6.875%, and the term is 25 years. Borrower is single with an adjusted gross income of $25, 000/yr. The interest on this loan would normally be $229.17 per month, but the borrower would qualify for an IBR payment of $93.69. In this case, the borrower would be forgiven $229.17 – $93.69 = $135.48 of interest per month. If this persons financial situation does not change for three years, they would be forgiven $135.48 x 36 = $4, 877.28.