(Updated February 26th, 2014)
President Obama is Not Forgiving 100% of Student Loans
First off – the articles claiming that President Obama’s new student loan forgiveness plan will erase 100% of Federal student loan debt in the country are a lie.
This story was born when a fake news website (like the Onion) wrote it as a joke, but has since gained momentum from SEO spammers and shady marketers trying to make money off your advertising clicks.
What is true is that President Obama introduced a new cost-savings program for those with Federal student loan debt that includes both loan forgiveness, as well as a significant reduction in monthly payments.
Find the details about the President’s real student loan forgiveness program below.
The State of the Union Speech
President Obama’s student loan forgiveness plans continue to evolve, but virtually no new insights were shared during his recent State of the Union address.
In fact, during his State of the Union speech delivered on January 28th, 2014, President Obama only briefly touched on student loans, signalling that he might actually be backing away from some of the bolder parts of his recent proposal to reform student loan debt.
He did state that he wants to make higher education available for everybody, but did he mention anything about how he actually intends to do this?
As usual, and this seems to be par for the course with political speeches, he didn’t mention any details about what he plans on changing, so we’re not entirely sure.
Below you’ll find a summary of the student loan reforms that President Obama previously announced, including an analysis of what’s changing, who’s eligible to receive the benefits, and how to apply for the program.
Be sure to check back soon for additional updates, as we’ll be expanding on the subject any time that there’s new information about the President’s plan to reform student loan debt.
Attacking Excessive Student Loan Debt
If you have federal student loan debt then President Obama’s student loan forgiveness program might be your best opportunity to save some serious money.
Virtually all of the students who graduate college in 2014 will emerge with massive student loan debt.
In fact, a CNN Money article released on December 5th, 2013 reported that the average student loan debt for college graduates in the United States now sits at $29,400.
A study by the Federal Reserve Bank of New York way back in 2012 revealed that, even then, more than 10% of graduates owed more than $54,000 in student loans, while 3% of them had racked up more than $100,000 in debt!
Fortunately, President Obama’s debt relief program offers some significant value to those with excessive student loan debt, providing major benefits that will reduce their financial liability, allowing them to avoid defaults and bankruptcy.
There is a downside to the President’s plans, however, which is that only very few people will actually qualify for his loan forgiveness program, because of excessively restrictive eligibility guidelines.
Two Major Benefits of Obama’s Student Loan Reforms
President Obama’s plan to provide student loan relief is extremely lucrative for those holding federal student loan debt that was incurred within the restrictive eligibility window, with two significant changes that offer massive financial assistance to those who qualify for the program:
- Student Loan Debt Forgiveness – After borrowers have made 240 payments (20 years) that were full, scheduled, and on-time, whatever is left of their student loan debt will be forgiven entirely (the payment threshold is reduced even further to 120 payments for Public Service workers)
- Introduction of the “Pay As You Earn” Student Loan Repayment Plan – This plan limits monthly federal student loan payments to 10% of the borrowers discretionary income (defined as income above 150% of the poverty line for a borrower’s family size and location)
It may not seem like much, but these two reforms alone are likely to save millions of borrowers tens of thousands of dollars each.
In fact, the total savings from these two basic reforms is likely to be in the billions of dollars.
President Obama’s Student Loan Debt Forgiveness Plan
Probably the most important piece of the new student loan reforms introduced by President Obama is the change made to existing Federal law regarding student loan forgiveness.
Previous rules stipulated that Federal loans would be forgiven after making 300 full, on-time, scheduled payments (25 years of payments), but the President’s new plan drops that restriction down to just 240 payments (20 years of payments), which will offer significant savings for some borrowers.
In addition, public service workers (teachers, nurses, military personnel, etc.) will be eligible to have their outstanding balances forgiven after just 120 payments (10 years of payments), which is a tremendous benefit to them.
President Obama’s “Pay As You Earn” Plan
The “Pay As You Earn” component of the President’s forgiveness plan is similar to income-based repayment, or income-contingent repayment, and essentially caps your monthly student loan payments based on the amount of money you’re earning.
“Pay As You Earn” adds to the list of existing Student Loan Repayment Programs, allowing you to schedule your loan term to last up to 20 years, and providing flexible payments that will change based on the amount of money you’re earning.
This repayment plan is a significant benefit to those people with excessive student loan debt, low incomes, or fluctuating income levels (not salaried, working seasonal jobs, working for commission, etc.), since the amount of their monthly student loan payments end up being flexible, rather than fixed.
What Does Pay As You Earn Do?
Previous federal student loan law capped monthly student loan repayments at 15% of discretionary income, which crippled recent graduates, people with high debt to income ratios, and others who simply didn’t have enough money left over after that 15% for bills and other living expenses.
Under President Obama’s new “Pay As You Earn” student loan repayment plan, monthly student loan payments will now be capped at just 10% of discretionary income.
If you don’t think that 5% difference makes much of a splash to personal finance, then you’ve got it all wrong, because 5% could mean the difference between going to bed hungry, or falling asleep with a belly full of food each night.
There are some restrictions on eligibility for the “Pay As You Earn” repayment plan though, because it’s only being made available to individuals with certain types of federal student loans.
Here’s a list of the federal student loans that will qualify for this component of President Obama’s student loan forgiveness program:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS loans made to students
- Direct Consolidation Loans, except for Direct or FEEL PLUS loans issued to parents of students
What that means is that if you’ve got student loans from a private lender, or that are part of some other federal program (like a PLUS loan issued to parents), then you won’t qualify for the benefit, and won’t receive any additional financial assistance from these reforms.
Eligibility Restrictions for the President’s Plans
There are two major eligibility considerations required to qualify for the Pay As You Earn plan. They are:
- You must have a Partial Financial Hardship – The amount you would be required to pay on your eligible federal student loans with the 10 year long Standard Repayment Plan must be higher than the monthly amount you would owe under Pay As You Earn
- You must be a New Borrower as of October 1st, 2007 – You must have taken out your Direct Loans on or after October 1st, 2007. Any loans taken out before then will NOT qualify for the Pay As You Earn plan, so anyone with older loans doesn’t qualify for this new repayment plan
The Problem With President Obama’s Reforms
As outlined above, there’s a pretty serious catch involved with President Obama’s student loan reforms, since excessive eligibility restrictions are going to mean that the vast majority of people reading this post won’t be eligible for either his new Student Loan Forgiveness plan, or for the Pay As You Earn plan.
Here’s a more detailed explanation of what it means to be a New Borrower, and what it means to have a Partial Financial Hardship.
What is a “New Borrower”?
To qualify for the benefits, you must meet the following conditions:
- You must count as a “New Borrower” on or after October 1st, 2007
- Here’s the official definition of a “New Borrower” (from the Pay as You Earn fact sheet, which you can find here)
“You are a new borrower if you had no outstanding balance on a Direct Loan or FEEL Program loan as of Oct. 1, 2007, or if you had no outstanding balance on a Direct Loan or FEEL Program loan when you received a new Direct Loan or FEEL Program loan on or after Oct. 1, 2007. In addition, you must have received a disbursement of a Direct Subsidized Loan, Direct Unsubsidized Loan, or Direct PLUS Loan for graduate or professional students on or after Oct. 1 2011, or you must have received a Direct Consolidation Loan based on an application that was received on or after Oct. 1, 2011″
So, in English… what does that actually mean?
- Only those borrowers with Direct Loans that were taken out on or after October 1st, 2007 will qualify for the Pay As You Earn program
- Your loans taken on or after October 1st, 2007 will only qualify if you don’t have any existing Direct Loans or FEEL Program Loans still in repayment which were taken out before October 1st, 2007
Our response? Are you kidding me?
Sorry, but why would President Obama talk about making higher education available to everyone, then pass a program that only helps those who have borrowed since 2007?
What about people who are already mired in student loan debt, who have been paying it off for 10, 15 or even 20 years, but owe just as much or even more than they did when they first began paying it off?
Honestly, I wish I had better answers to these questions, or that I could say that it comes down to something OTHER than “Politics as usual”, but I’m fairly certain that this is all politically driven.
Hopefully, the next President, or the American Congress (yeah, right!), will wake up to fact that EXISTING student loan debt is a threat to our national security, and that recent borrowers aren’t the only population in dire need of financial assistance.
What is a Partial Financial Hardship?
Having a “Partial Financial Hardship” is the other eligibility stipulation that even further restricts access to the Pay As You Earn repayment plan.
Not only do your loans need to have been taken out on or after October 1st, 2007, but you also need to be pretty impoverished, with a large debt to income ratio (and your ratio is calculated using only your student loan debt, not other debt like credit cards, mortgages, etc.).
The Government defines a “Partial Financial Hardship” as:
… the monthly amount you would be required to pay on your eligible federal student loans under a 10-year Standard Repayment Plan is higher than the monthly amount you would be required to repay under Pay As You Earn.
Fortunately, if you’re really having big problems making your monthly student loan payments, then it’s likely that you’ll qualify for the program under this stipulation, because it’s a little easier than it might seem at first glance.
And, Uncle Sam cuts you a pretty significant break when making your calculations, because you’re going to get to factor in all Direct Loans that are eligible for Pay As You Earn, as well as some FEEL Program loans (even though none of those are eligible for the Pay As You Earn plan).
To find out if you are, in fact, eligible for this portion of the plan, please visit the Federal Student Aid website and try out their handy “Repayment Estimator” (it’s a student loans repayment calculator).
Frequently Asked Questions
President Obama’s new student loan forgiveness program is quite controversial, especially due to the insanely restrictive eligibility guidelines explained above, and there’s quite a bit of misinformation scattered around the Internet regarding how it works.
In fact, it’s so confusing to most people that we receive more emails and comments on a daily basis about this program than about everything else we’ve covered on this site.
Whether it’s asking who qualifies for the program, how to apply to it, or what it actually offers, we’ve received so many different questions that we decided to develop this FAQ section of the page to address the most common concerns.
If you have questions that aren’t covered here, please ask them in the Comments section at the bottom of the page. We’ll do our best to get you a response within 24 hours.
What Is Loan Forgiveness?
A cancellation of your debt.
In fact, loan forgiveness is the best type of debt relief, since it typically involves cancelling some set amount of your debt, without any need to spend any money out of pocket (unless you end up owing income taxes on whatever amount was forgiven).
For example, the new loan forgiveness program proposed by President Obama allows you to completely stop paying off your loans after you’ve made 240 full, scheduled, on-time monthly repayments (20 years of payments). Whatever debt is left after those 240 payments is completely forgiven.
Who Qualifies for this New Program?
To qualify for President Obama’s student loan forgiveness program, you’ll have to satisfy each of the following conditions:
- You have both a Direct federal loan and a guaranteed federal loan
- Both of your student loans were disbursed in 2008, or later
- At least one of your student loans was disbursed in 2011, or later
- Your student loans are not in default
How Do I Apply to It?
You don’t, for the loan forgiveness piece, but you can for the Pay As You Earn Plan.
For loan forgiveness, there’s no application form to fill out quite yet, likely because no one will be able to qualify for forgiveness until after October 21st, 2031 (at the earliest).
For the Pay as You Earn Plan, the Government recommends that you first contact your lender to ask them for specific details regarding whether or not you would qualify for the plan, and only then should you complete the online form for Income-Based (IBR)/Pay As You Earn/Income-Contingent (ICR) Repayment Plan Requests, which you can find here.
How Does Income-Based Repayment Work?
This is pretty simple.
The way that IBR works is that your student loan repayments will be capped at 10% of your discretionary monthly income (income that’s above 150% of the poverty line for your family size and location).
So, for example, if your discretionary income came out to be $100,000 a year, your monthly student loan payments would be limited to $833.33. Here’s how to do the math:
- Your annual discretionary income / 12 months per year * .1 = your maximum monthly payment
Are Private Loans Covered?
President Obama’s administration does appear to be trying to get something done about reforming private student loan debt too, but currently, there is no protection or benefit available to those with exclusively private student loans.
For those of you that don’t have student loans yet, but are planning on using them, make sure that you avoid borrowing from private lenders at all costs, as they do not offer the same kind of assistance programs that you’ll have access to with federal loans.
What Loans Are Eligible?
President Obama’s loan forgiveness program is extremely selective, so even though it sounds like it’s going to do a world of good, only a very select few people will actually qualify to have their loans forgiven.
First, only Direct student loans are eligible, and second, only Direct student loans issued on or after October 1st, 2011 are eligible.
Additionally, loans issued on or after 2011 won’t be eligible if you had existing Direct or FEEL Program loan debt that was still in repayment when your new loan was issued.
Because of these restrictive qualification guidelines, the vast majority of people with student loan debt will not be able to take advantage of this program.
Should I Consolidate My Loans?
Maybe, maybe not.
If you’ve got both a Direct federal loan and a guaranteed federal loan, then consolidating them will allow you to receive a .25% decrease in your monthly payment. .25% isn’t a whole lot per month, but over the course of your loan, that can make a big difference.
There are downsides to consolidating your loans though, as some loans come with specific debt relief programs of their own, some come with special interest rates, and others are eligible for cancellation and forgiveness programs, so you’ll need to do some research to make sure that the .25% decrease in monthly payments is worth it.
Should I Sign Up For Automatic Payments?
If you sign up for automatic payments on your loans, you’ll also receive a .25% discount in monthly payments, just for proving to the Federal Government that your money will arrive on time, and in full, each month.
This is definitely worth it for those of you who aren’t shuffling funds between accounts to come up with enough for the monthly payment.
Does the New Plan Cap Student Loan Interest Rates?
The new program proposes capping interest rates for all federal student loans at just 3.4%, which is significantly lower than what you’d be paying if you borrowed from a private lender.
It’s lower even that what’d you’d get when borrowing to purchase a home! However, this interest rate cap is only being applied to loans that were taken out before July 2012, so for those of you looking to get a loan now, this piece won’t help.
Are Defaulted Loans Eligible?
In fact, most of the debt relief programs available for federal student loans won’t be accessible if your loan enters default. If you’re already in default, you need to contact your lender immediately to try and get out of it, but if you think you’re about to go into default, then it’s time to take drastic action.
Start by looking into the many available student loan deferment programs to see if you can put your loan on pause while you save up funds so that you can avoid defaulting on the loan.
(The content below was written before February 5th, 2014, and some of it may be outdated)
Reforming Student Loan Debt Relief
President Obama’s student loan forgiveness plan attacks the problem of excessive student loan debt with a multi-pronged approach to providing debt relief, and as such it’s been celebrated by many people, including some of his political opponents.
In the President’s own words, the reason for pushing this reform program is that “Student loan debt has now surpassed credit card debt for the time ever… and when a big chunk of every paycheck goes towards student loans instead of being spend on other things, that’s not just tough for middle-class families, it’s painful for the economy and it’s harmful to our recovery because that money is not going to help businesses grow.”
Earlier Student Loan Forgiveness
Previous federal law provided a provision stating that student loan debt incurred via federal loan programs would be completely forgiven after 25 years, but few borrowers were even aware of this provisions existence, so hardly any took advantage of it.
President Obama and Congress passed a law in 2010 to help further reduce the burden on former students by reducing the complete debt forgiveness timeline to a period of 20 years, significantly increasing graduates ability to get out from under crushing federal student loan debt, but this change wasn’t set to take place until 2014.
Under President Obama’s student loan forgiveness program, the timeline for complete debt forgiveness of federal student loans has been pushed up to being first available in 2012, allowing an estimated 1.6 million former students access to earlier debt relief.
New Debt Consolidation Options
The third major tenet of Obama’s new student loan forgiveness program is to help reduce the confusion and logistical problems that many with student loan debt currently face.
According to a study by his administration, they found that an estimated 5.8 million people were managing a Direct Loan (DL) and Federal Family Education Loan (FFEL) at the same time, making separate payments to the different accounts, which made the process more difficult, more time consuming, and more likely to lead to defaults.
Under President Obama’s changes to federal student loan law, the new plan allows borrowers to consolidate their student loan debt into a single account, making a single monthly payment to a single lender for both loans.
Furthermore, the plan offered borrowers who take advantage of the new debt consolidation option to receive up to a 0.5% reduction in their interest rates on qualifying loans, meaning lower monthly payments and perhaps tens of thousands of dollars of savings over the lifetime of those loans.
Debt Relief for Start-Up Entrepreneurs
In coordination with President Obama’s student loan forgiveness program, the U.S. Small Business Administration announced that it take part in the White House-led Startup America initiative to help walk young entrepreneurs through the process of reducing their monthly student loan payments.
Additionally, the Young Entrepreneur Council’s private sector Gen Y Fund announced it had committed to investing at least $10,000,000 in up to 100 startups headed by millenials, including promising to pay down remaining federal student loan debt obligations for the same entrepreneurs over the next three years.
Additional Public Service Benefits
One under-publicized portion of the President’s recent changes to student loan forgiveness includes a provision that reduces the number of years those entering public service jobs have to wait until their loans are forgiven.
While previous law stated that graduates with federal student loan debt had to serve 20 years in public service positions, but the new provision reduces that requirement by a full 10 years, making public service jobs significantly more attractive to those graduating with excessive levels of student loan debt.
Obama’s student loan forgiveness program only applies to certain borrowers with eligible loans, so just because you have student loan debt doesn’t mean that it will necessarily help you.
Qualifications for eligibility include:
- Borrowers must have taken out their federal student loans after October 1st, 2007
- Borrowers with exclusively private student loans do not qualify
- Borrowers must meet salary-to-debt ratio conditions as determined by the IBR calculator
- Loans cannot be in default
- Loans already in repayment are not eligible for these new benefits
President Obama’s “Know Before You Owe” Project
The second major piece of President Obama’s new plan to reform student loan debt includes an attempt to better inform potential borrowers of the dangers inherent in taking out student loans.
Announced by his administration, the “Know Before You Owe” project, a collaboration between the Consumer Financial Protection Bureau and the Department of Education, released a Financial Aid Shopping Sheet that included a draft model financial aid disclosure form to help colleges and universities present financial aid information to their students.
The goal of this new project is to let students better understand the type and amount of financial aid that they qualify for, and to help them better compare aid packages offered by different institutions (both public and private).
Furthermore, the form makes the total costs, and all of the risks of the student loans extremely clear, all before any student has enrolled in a program, by outlining total estimated student loan debt, monthly student loan repayments after graduation and any other costs not covered by the federal aid packages that the student qualifies for.
For more information on the Know Before You Owe project, please visit the Consumer Financial Protection Bureau’s page here: Know Before You Owe.
American society has always pushed higher education as an important step in becoming a respected, productive member of society.
For generations, college degree programs have served the population well by providing a major driver of upward mobility that allowed people to move from the very bottom of the earning barrel through the ranks of the middle class and into incredibly lucrative careers.
Recent developments, including excessive increases to college tuition rates, extreme increases in the costs of college textbooks and torrents of recent college graduates entering an incredibly weak economy have significantly reduced the expected return on investment for the average college degree, but this program seeks to counter those changes.
President Obama’s student loan forgiveness plan could help remedy an impending financial disaster by preventing excessive debt from being racked up by future college graduates, and by giving those who are currently being destroyed by overwhelming debt an easier, more efficient way out of the downward spiral that they currently face.
The student loan debt crisis is real, and programs like these are just one potential solution, but how well will they actually work?
What Do You Think?
The right and the left have both weighed in on this plan, with relatively expected results (we are in an election year after all), but what do you think about it?
Does President Obama’s student loan forgiveness program provide enough effective debt relief, or is it a band aid on a gaping wound?
Is he right to offer this kind of support for college students, or should he stick to other policy objectives? Let us know what you think.