Federal Student Loan Forgiveness in 2016

There’s no big change here – federal loans are still one of the most favourable options for borrowing money and enjoying a couple of benefits that don’t come with other types of debt. Student loan forgiveness is one of the benefits.

Student loan forgiveness changes will be based on the revised Pay as You Earn Plan (REPAYE). Under this new proposal, such a plan will be the only income-driven repayment option for the students that obtain their first student loan after July 1, 2016.

Currently, the number of income-driven repayment options is bigger. The change has been introduced in an attempt to help the students that have the most need for financial assistance in terms of making loan repayments.

The standard income-based repayment comes with a cap of 15 per cent of the borrower’s income. Any balance that remains after a repayment period of 25 years will be forgiven. The period is taken down to 10 years for individuals working in the public service field. Public service workers, non-profit organisation employees and government employees all remain eligible to the Public Service Loan Forgiveness Program (PSLF) that has somewhat different conditions from what everybody else is entitled to.

New regulations fix that cap at 10 per cent of the borrower’s income. Forgiveness becomes possible in only 20 years.

The new Pay as You Earn plan, unfortunately, isn’t going to be open to the individuals that have gotten a loan prior to July 2016.

Though the new plan features much more favourable student loan forgiveness options, it comes with stricter limits on the benefits. These will also apply to the first-time student loan borrowers that get approved for their loan after the beginning of July 2016.

The graduate students that have a balance of 57,000 dollars or more will be eligible for student loan forgiveness in a period of 25 years rather than 20. The public service forgiveness amount is capped at 57,000 dollars.

Student loans that are married will not get an opportunity to exclude their spouse’s income from income-based loan repayment calculations. As already mentioned, the aim of the new plan and the accompanying regulations is to direct funds to the students that have the highest need.

Apart from the very important changes in the student loan forgiveness opportunities, there are several other loan modifications that future borrowers need to acquaint themselves with.

Variable-rate loans will also be subjected to a couple of new regulations in 2016. The Federal Reserve increased interest rates in the first days of 2016. A quarter point increase was approved, which will have an impact on variable-rate loans.

This means that individuals having a private student loan with a variable interest rate will potentially see an interest increase during 2016. The increase introduced by the Federal Reserve may be considered negligible, a further gradual hike could be expected in the months to come.

Also, the federal Perkins loan program that expired in 2015 will be renewed. The eligibility requirements, however, will be different from the ones valid prior to the expiration of the program. Before getting a Perkins loan, borrowers will have to attempt both subsidised and unsubsidised federal loan options. Only if none of the opportunities work out will a Perkins loan be provided.

Thus, Perkins loans remain reserved solely to the students in dire financial need that have exhausted all other possibilities. The extended proposal will make approximately 8.5 billion dollars available to the provision of Perkins loans on an annual basis.

One very important thing to keep in mind is that 2016 is going to be a presidential elections year. With a change in administration, chances are that changes in student loan policies and forgiveness programs are to be expected. We’ll simply have to wait and see who’s going to get in office and whether this new appointment is going to have a massive impact on student loan borrowers.