President Obama’s Student Aid “Bill of Rights”
I’ve got good news again!
On March 10th, 2015, President Obama announced a new initiative this his Administration is calling the “Student Aid Bill of Rights”.
This Bill of Rights introduces some significant changes to the policy regulating Federal student loan debt, and promises to do three things:
- Create a complaint system that borrowers can use to file official complaints about loan servicers, debt collectors and Department of Education Personnel
- Make it easier for borrowers to pay off their Federal student loans by modifying the existing Obama Student Loan Forgiveness Program and increasing access to the Pay As You Earn Student Loan Repayment Plan
- Launch a new Federal task force focused on researching the problems related to student loan debt, and dedicated to finding new solutions via proposed legislative and regulatory changes
The most important part of the “Bill of Rights” is probably the reiteration of the President’s commitment to open up the Pay As You Earn Repayment Plan to everyone by December 2015.
Unfortunately, even though the President has requested that happen, it’s up to the Department of Education to actually turn that promise into a reality, and I haven’t received any updates on how well that process is going.
From what I can tell, they are still aiming to hit that deadline, but we’ll see how things play out.
For additional details, please view my recent Blog post about the Student Aid Bill of Rights.
CROMNIBUS’s Impact on President Obama’s Loan Forgiveness Program
I’ve got great news!
As of February, 2015, the dust has had time to settle on the passing of the “cromnibus” proposal (the approval of President Obama’s 2015 Federal Budget), it’s clear that only positive changes are being considered for the President Obama Student Loan Forgiveness Program, the Pay As You Earn Student Loan Repayment Plan, and the Public Service Loan Forgiveness Program.
If you look back to my update from March 18th, 2014, you’ll see that I was seriously concerned about some of the proposed limitations being considered for these programs, especially because the changes would have reduced their effectiveness at helping people wipe out excessive student loan debt.
Fortunately, according to the language of the approved 2015 Federal Budget, it doesn’t look like any of the previously-proposed nerfs are going to be made into law any time soon. In fact, none of the changes were even mentioned at all in the CROMNIBUS, signaling that Washington Politicians may be abandoning their attempts to cut benefits from the excellent Federal student loan forgiveness programs.
But is this just politics as usual? Will the upcoming reauthorization of the Higher Education Act talks see the re-introduction of these cuts in benefits, or are they really out of consideration for good?
It’s hard to tell, but for now, the good news is that everyone’s favorite student loan forgiveness program benefits appear to be safe, and that the President Obama loan forgiveness program will continue to save people tens to hundreds of thousands of dollars on their Federally-funded student loans.
What is President Obama’s Loan Forgiveness Program?
President Obama’s student loan forgiveness program introduced three major changes to Federal student loan forgiveness laws, including:
- Complete forgiveness of Federal student loan debt after borrowers have made 240 monthly payments
- Introduction of the Pay As You Earn Student Loan Repayment Plan
- Updates to the Public Service Loan Forgiveness Program
This page talks about the President’s student loan reforms in detail, and it receives updates whenever news is announced. Be sure to check back throughout 2015 for the latest information about what’s available, what’s being proposed, and what’s being changed.
Debt Forgiveness for Federal Student Loans
Because of President Obama’s student loan forgiveness program, qualifying borrowers who are participating in the program are now eligible to have all of their Federally-funded student loans completely erased after they’ve made 20 years worth of payments on the debt, no matter how much might be left over.
That means that you can borrow money for college from the Federal Government, and that after you’ve made 240 monthly payments on your debt (no matter how much you have or have not paid off), you won’t have to make any more monthly payments.
You will have to pay taxes on the debt that is forgiven, but we’ll leave that out for now and cover it in detail later on.
The Pay As You Earn Student Loan Repayment Plan
I explain Pay As You Earn in detail further down on this page, but to really understand what this program offers, how it works, and how best to take advantage of it, please visit this website’s page about the PAYE plan here.
To cover it briefly – PAYE is an income-based repayment plan that offers total debt forgiveness after you’ve made 20 years’ worth of monthly payments on your Federal student loan debt.
That means that no matter how much money you’ve borrowed, or how much you still owe, you will stop having to make monthly payments after you’ve made 240 of them.
That’s a great deal, especially for those borrowers who end up taking out a ton of money for college, but who don’t end up making enough money to actually pay back their debt.
Updates to the Public Service Loan Forgiveness Program
The Public Service Loan Forgiveness Program has been around for years, but was updated and made better by President Obama’s student loan reforms.
Previous law stipulated that people enrolled in the PSLF program had to make 20 years worth of payments on their Federal student loans before their debt would be forgiven, but thanks to Obama’s student loan changes PSLF loan forgiveness is now available after making just ten years worth of payments!
This is, by far, the best student loan forgiveness program available, and one that virtually anyone can take advantage of because the eligibility requirements are not that stringent.
To get detailed information about the PSLF program, please visit this website’s page about Public Service Loan Forgiveness, here.
How Does Obama Loan Forgiveness Work?
There’s a lot to the President’s loan forgiveness program, but in a nutshell, his program implemented changes to the previous Federal loan forgiveness programs to make it easier for borrowers to get out of paying back their Federally-funded student loans.
The President’s updates make it easier for people to borrow money for college that they won’t have to pay back, because the new Federal student loan forgiveness laws allows people to have their Federally-funded student loan debt forgiven after they’ve made a certain number of monthly payments (regardless of how much of the debt they’ve actually paid off!).
The most important component of the President’s student loan forgiveness program was the introduction of the new student loan repayment plan called the “Pay As You Earn” plan (often abbreviated as “PAYE”), which is an income-based repayment plan that helps people qualify for debt forgiveness sooner than they were previously able to.
This new repayment plan is similar to the ever-popular Income-Based Repayment Plan, and Income-Contingent Repayment Plan, each of which allow borrowers to set monthly student loan payments based on a percentage of their discretionary income.
What does that mean? It means that you can borrow money from the Federal Government to go to college without worrying that you won’t be able to pay it back later. If you can’t find a good job after you graduate, then your monthly student loan payments won’t be all that high.
In fact, when enrolled on the PAYE plan, you could even owe over $100,000 in Federal student loans, but have a monthly payment of $0!
(Updated June 10th, 2014)
President Obama Increases Access to Pay As You Earn
Yesterday, President Obama announced new changes to the Federal student loan forgiveness program, including one sweeping change that makes the extremely valuable Pay As You Earn Student Loan Repayment Plan available to over 5 million more borrowers.
Here are the details of President Obama’s executive order:
- The Pay As You Earn repayment program will have its eligibility criteria relaxed, allowing anyone with Federal student loan debt to qualify for the plan (say goodbye to the October 2007 restriction!)
- Eligibility to enroll in the program will not open up until December, 2015, so those of you who don’t qualify for it under the current restrictions will have to wait until then to apply
What is Pay As You Earn?
One of the biggest problems to President Obama’s student loan forgiveness program is that most people aren’t even aware of it’s existence.
We’ve all heard about Obamacare, but not everybody knew about Pay As You Earn, and that’s a shame, because it’s an extremely valuable program.
Pay As You Earn is the newest of the 7 Federal Student Loan Repayment Plans, and was first introduced as part of President Obama’s sweeping student loan reforms proposed in 2011, and officially live as of 2012.
Borrowers who sign up for the Pay As You Earn repayment plan have their monthly Federal student loan payments capped at just 10% of discretionary income, saving hundreds to thousands of dollars per month.
The downside to Pay As You Earn is that it extends the life of a loan by adding payments, and making the total loan more expensive since interest has more time to accumulate additional debt.
However, to protect borrowers from facing significantly more debt, Pay As You Earn also offers comprehensive student loan forgiveness once 20 years of full, on-time, scheduled monthly payments have been made.
In addition, those borrowers working in public service, either for the Government of a Nonprofit organization, are offered student loan forgiveness after making just 10 years worth of on-time payments.
Pay As You Earn might not be the best student loan repayment plan for you, since it depends on your particular situation (the amount you owe, your interest rate, your income, the poverty line for your state and family size, etc.), but it is a great option for many borrowers, especially those struggling to make their existing monthly payments, or those with excessive levels of student loan debt and no real hope for ever paying it off.
For additional details about the Pay As You Earn plan, and to find out if it’s the best repayment plan for you, please visit this page.
Obama Announces Support for Refinancing
In addition to changing the rules on Pay As You Earn, President Obama’s speech also offered support for the Bank on Students Emergency Loan Refinance Act, which was proposed by Democratic Senator Elizabeth Warren of Massachusetts.
This act seeks to change Federal law to allow borrowers with Government-backed student loans to refinance them at current interest rates, reducing both monthly payments (like PAYE), but also reducing total outstanding debt.
For those borrowers who took out loans before interest rates plummeted, this change could stand to save them significantly more money than access to the PAYE plan, but more importantly, it would actually reduce their total debt.
Compared to PAYE, which reduces monthly payments, but actually increases total outstanding debt, we see this as a far more valuable reform, and we’ll be watching it’s progression closely.
President Obama to Announce Updates Today
(Updated June 9th, 2014)
According to a variety of media sources, President Obama will be announcing updates to his student loan forgiveness program today.
A White House official has alerted the media that the updates will include:
- Expanding the eligibility criteria for the Pay As You Earn Student Loan Repayment Plan, which caps monthly student loan payments at just 10% of discretionary income
Apparently, President Obama will also be promoting a recent proposal from Senator Elizabeth Warren, which suggests that borrowers should be able to refinance their Federal student loans.
The official announcement will be released today at 10:45 am, PST, and we’ll update this page as soon as details are made public.
Check back this afternoon, or first thing tomorrow morning, for the full story.
(Updated March 18th, 2014)
Proposed Changes in the Fiscal Year 2015 Budget
It looks like President Obama’s student loan forgiveness plan is about to undergo another series of significant changes, some of which are positive, but others which will crush some people’s hopes for ever getting out from under excessive student loan debt.
The Obama Administration’s proposed budget for fiscal year 2015 is set to make 7 major changes to his student loan debt reforms originally introduced a few years back, with 3 changes that appear to be positive for borrowers, and 4 that look pretty scary for certain situations (high-income borrowers and public service workers).
Here’s a comprehensive review of what is set to change, should Congress approve of the budget without altering any of it’s proposed initiatives.
Positive Changes to the Obama Student Loan Reforms
We’re going to start with the bright side of the proposed 2015 budget, since we like to lead with the good news first.
Here are three major reasons why you should be hoping that President Obama’s new budget plan gets approved by Congress:
1. Pay As You Earn Will Be Made Available to Everyone
Perhaps the biggest weakness to President Obama’s debt forgiveness program has been the fact that the awesome Pay As You Earn Plan (PAYE) was only available to certain borrowers who met excessively restrictive eligibility conditions.
Well – we’ve finally got some good news for those of you who weren’t previously able to qualify for PAYE benefits (anyone with student loans older than October 1st, 2007, meaning the majority of our readers!) – PAYE is about to get opened up to everyone, no matter when their loans were taken out!
Under current law, if your loan is older than October 1st, 2007, then the Income-Based Student Loan Repayment Plan (IBR) is likely to be the most affordable of the 7 Student Loan Repayment Plans available to you, capping your monthly student loan payments at 15% of discretionary income.
If the Obama Administration’s 2015 budget is approved, you’ll get the chance to enroll in the new Pay As You Earn Student Loan Repayment Plan, which has a lower cap for monthly payments, setting them at just 10% of discretionary income.
That 5% may not sound like much at first glance, but do the math and you could find yourself saving quite a bit of money each month!
In addition to reducing your monthly payments by 5%, PAYE also offers total student loan forgiveness after just 20 years of payments (whereas IBR doesn’t provide forgiveness until 25 years).
Those are some serious benefits, virtually guaranteed to help the vast majority of people looking for Federal Student Loan Debt Relief.
(Please do note though that compared to the IBR plan, PAYE could end up making your student loans more expensive in the long-run, since your loan term will be extended and more interest will accumulate over the course of the loan, but that switching to the new plan will certainly help make things more affordable in the short-term.
Although, if you’re planning on making 20 years of payments and taking advantage of Federal Student Loan Forgiveness, then don’t worry about this piece, because you’ll end up saving money from switching off IBR to PAYE in the long-run too!).
2. Loan Forgiveness Won’t Bring Tax Penalties
This is another huge benefit that will help the vast majority of Federal student loan borrowers, and it’s certainly a big step in the right direction for attacking the Student Loan Debt Crisis!
The biggest problem with previous Federal forgiveness programs (including forgiveness benefits under both the IBR and PAYE plans) is that when you have your student loan debt forgiven, the amount written off had to be added to your tax return as taxable income!
Many borrowers aren’t even aware of this catch to loan forgiveness, but it’s especially important since it could end up costing you thousands of dollars in additional taxes down the road.
In fact, the tax penalty could absolutely crush those borrowers with Direct Subsidized or Unsubsidized student loans whose minimum payments aren’t high enough to cover interest charges each month, since the balance they eventually have “forgiven” could end up being far higher than the amount of money they originally borrowed!
Faced with such a situation (and this is ridiculous if you ask us), it’s possible that the eventual tax bill on the debt you have forgiven could actually end up being more expensive that the amount of money that you borrowed in the first place!
How pissed off would you be if you finally qualified for loan forgiveness after making 25 years of payments, then realized that you owed more in taxes alone than you originally took out to pay for school, in addition to all the money you had spent over that 25 year period of making payments!!!
Fortunately, should the 2015 budget changes go through, whatever debt eventually gets forgiven won’t incur a tax penalty, which we see as the biggest benefit to anyone who’s actually pursuing eventual loan forgiveness, and a major upside to President Obama’s loan forgiveness program.
3. Monthly Interest Accrual Will Be Capped
Here’s another incredible benefit that will directly help many of our readers (including a great many of you who have commented here before!).
This change alone has actually encouraged me to create some sort of email list or newsletter that you can sign up for so that I can send out an e-blast whenever a change like this is proposed (so we can fill out petitions requesting it get approved) or implemented (so you all can take advantage of it!). More on that later though…
One of the biggest problems with paying off student loan debt happens when monthly payments aren’t high enough to cover the interest that’s accumulating on the loan, which leads to something called interest capitalization.
Interest capitalization is the process the banks use to dramatically drive up the long-term costs of loans, by adding the accrued interest to the original principal of the loan, which can end up making a loan significantly more expensive.
In fact, under existing law, it’s possible that you could be making your full, scheduled, on-time payments each month, but still end up owing more money anyway!
This is a major problem for those borrowers with Unsubsidized Loans who been relying on Federal Deferments or Forbearance Programs, since the Government doesn’t cover the costs of their monthly interest accrual for them while their loans are on pause.
These people are therefore receiving excellent temporary debt relief, but significantly inflating their long-term debt obligations due to having new interest recapitalized.
And this is exactly how you could end up borrowing something as little as $25,000 in student loans, then end up owing something like $250,000 15 years later.
Fortunately, President Obama’s 2015 budget includes a provision set to cap interest accrual at just 50% when a borrower’s monthly payment isn’t sufficient to cover the interest accumulating on their loan.
50% interest accrual might still sound high to you, but under current law, there’s no cap in place at all!
Again, this is huge for any borrowers having trouble making their monthly payments, especially for those relying on Deferments and Forbearance programs, and we’re sure that this piece alone will dramatically help a large population of our readers.
Negative Changes to the Obama Student Loan Reforms
Unfortunately, the proposed 2015 fiscal year budget is going to cause some serious problems for certain people hoping to take advantage of President Obama’s recent student loan reforms, especially those with a lot of debt, and those seeking forgiveness benefits under the Public Service Loan Forgiveness Program.
Here are the four major detrimental changes that are set to be put into place should this new budget get approved and implemented by Congress:
1. Borrowers With High Debt Won’t Get Forgiveness As Early
This is a major problem for high-debt borrowers, including anyone with more than $57,000 in federal student loans.
According to the proposed 2015 budget, these borrowers won’t be able to receive loan forgiveness under PAYE at the new 20 year mark, but will instead have to slog it out for the full 25 years worth of payments before their debt is written off.
That might not sound like much, but tacking another 5 years onto loans over $57,000 essentially means that the people with the worst debt (who likely need assistance the most), are getting the short end of the stick, and will end up forking out massive amounts of cash for a longer period of time.
The Government and even some industry watchdogs and advocates are claiming that this will help protect the long-term sustainability of the PAYE program and the other Federal forgiveness programs currently in place, but to us, it seems an unnecessary cut when there’s so much largesse in public spending for other sectors (i.e. certain military programs, farm subsidies, oil subsidies, bank bailouts, etc.)
For that reason alone, we just can’t get behind this one, and we’re hoping that it gets removed before the 2015 budget goes live.
If you feel the same way, you’re strongly encouraged to call, write, or email your respective U.S. Representative or Senators to voice your opinion on the matter.
2. PSLF Forgiveness Will Be Capped at $57,000
If you’re not taking advantage of the Public Service Loan Forgiveness Program, then this won’t impact you at all and you can skip on to the next issue, but if you are, we’ve some seriously bad news.
The new 2015 budget will be dramatically reducing what’s now being labelled as a “windfall benefit” built into the PSLF program and President Obama’s loan forgiveness reforms.
Instead of forgiving up to 100% of your Federally-funded student loan debt, should this budget be put into place unaltered, PSLF will now only allow you to write off up to $57,000 of debt.
Hey, that’s still a lot of money, and for most borrowers this probably won’t lead to any problems at all, but for those of you with hundreds of thousands of dollars in student loans, who turned down private sector positions and are working in public service, this is a slap in the face.
Before you get too riled out though, there is a potential bright side here, because according to our research some of the top experts reviewing this situation are claiming that the change won’t apply retroactively to anyone already enrolled in PSLF.
If they’re right, and you’ve been working towards loan forgiveness already, we’ve got our fingers crossed that you’ll get grandfathered into a protection portion of the program and will be allowed to eventually write off the full amount of your debt.
But like we said above, it might be time to pick up the phone or mail out a letter to whatever politician represents you, because this point could lead to a financial disaster if all the pieces fall into the wrong positions.
3. Only Income-Based Plan Payments Will Count Towards PSLF Forgiveness
For a President who got himself elected trumpeting the benefits of public service, it sure does look like President Obama has turned his back on public sector employees, since this change also reduces the impact of PSLF forgiveness benefits.
Under the President’s existing student loan forgiveness program, PSLF forgiveness kicks in after just 10 years of “scheduled, full, on-time monthly payments” have been made, regardless of which student loan repayment plan they were made under (the standard plan, the graduated plan, income-contingent repayment, etc.).
But under the proposed 2015 budget, the only monthly payments that will count toward that 10 years’ wroth of payments requirement will be those made under one of the income-driven plans (Income-Based Repayment, Income-Contingent Repayment, Income-Sensitive Repayment or the Pay As You Earn Plan).
That’s a big bummer to anyone who started on the other plans, made months or years of payments under them, then switched to one of the qualifying plans.
But again, we’re holding out hope that even should these changes get implemented, they won’t be applied retroactively, so anyone who’s been playing by the rules in the past will remain eligible for forgiveness at the ten year mark.
4. Married Borrowers Can’t Separate Income Anymore
For certain borrowers, current rules for both the Income-Based Repayment Plan and the Pay As You Earn Repayment Plan offer some serious advantages to filling out your tax return as married, filing separately, especially when your spouse makes significantly more than you do!
Under either of these income-driven plans, filing your tax return jointly would cause both of your incomes to get considered when calculating your monthly student loan payments, so including your well-paid spouse’s earnings could end up leading to dramatically more expensive monthly payments.
And, unfortunately, that’s just what the new budget seems hell-bent on forcing you to do.
If President Obama’s proposed budget gets approved, you’ll no longer be able to able to use married, filing separately as a shield from larger monthly payments, and if your spouse has a substantial income, especially one that’s higher than yours, then you’d better start putting money away, because your monthly costs are about to skyrocket.
There’s a subtle silver lining here (it’s very subtle), since filing jointly will make your eligible to claim the standard Student Loan Interest Tax Deduction, but as of 2014, that’s just $2,500 per year.
If your spouse makes $50,000 a year, $100,000 a year, or even more than that, the $2,500 deduction isn’t going to do much to protect you from massive inflated monthly payments.
I hate to say it, but for some of you, it might be time to start considering a divorce for financial reasons.
In fact, I’d bet my last dollar that many couples will end up doing just that to skirt around this specific regulation, should it go into affect unaltered.
(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.
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