About the Obama Student Loan Forgiveness Plan

Initially, President Obama set into action the Student Loan Forgiveness Program which lets qualifying borrowers erase all their federally-funded student loans after make 20 years worth of payments. This applied to no matter how much debt is owed, as long as 240 monthly payments have been made. The new reform on this debt program has now made available debt relief after only making just ten years worth of payments. This may apply only to public service workers like teachers, nurses, or military personnel. Unless Obama has committed to this being for all borrowers, for now it is limited.

The eligibility requirements are not that stringent, so basically any borrower can benefit from this student loan forgiveness plan. The Obama Loan Forgiveness program is loaded with a lot of information and is consistently updated with new and implemented changes, as the President tries to make it easier for people to borrow money for college without extreme burden of debt and stress of default for borrowers.

Successful Components of the Obama Student Loan Forgiveness Program

Aside from the 10 year forgiveness loan plan, there is the introduction of a new repayment plan called “Pay As You Earn” plan (also referred to as PAYE), which helps people to qualify for debt forgiveness sooner by setting an income-based repayment plan. This is similar to the popular Income-Based Repayment Plan and Income-Contingent Repayment Plan; both which allow borrower to set monthly loan payments around their discretionary income.

Recently, this discretionary income percentage ratio was lowered to 10 percent, from the original 15 percent. Ultimately, this is a great plan to allow people to go to college with worrying they won’t be able to pay the loan back. Discretionary income is defined as income above the 150% of the poverty line for a borrower’s location and family size.

Other changes to the Obama student loan forgiveness plan include:

  • Relaxed eligibility criteria, ending the October 2007 restriction, so anyone with Federal Student Loan debt can qualify for the plan. However enrollment in the program will still be unavailable until December, 2015 to those who don’t qualify under current restrictions. The biggest disadvantage of this debt forgiveness program was that it initially was formed around looking at future debt of new borrowers. The program made only eligible those who obtained Federal loans after October, 2007. The other criteria for eligibility include being able to show 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.
  • The Obama Student Loan Forgiveness Plan is now opening to those who carry older student loans prior to 2007. This is said to affect over 5 million people by this reform who would have not been eligible before.
  • Bank on Students Emergency Loan Refinance Act, 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.
  • Loan Forgiveness won’t bring huge tax penalties. This had been the biggest problem with previous Federal forgiveness plan is that when you have your student loan debt forgiven, the amount written off was added to your tax return as taxable income!
  • Monthly interest accrual will be capped. This actually needs to happen. When monthly payments are not high enough to cover the accruing interest, it leads to something known as interest capitalization. This is a major problem for those borrowers with Unsubsidized Loans who been relying on Federal Deferments or Forbearance type programs, since the Government doesn’t cover the costs of their monthly interest accrual for them while their loans are on pause. So people are going to receive temporary debt relief and watch their loans inflate significantly. The average borrower takes out $25000 in student loans, then end up owing over a 100,000 due to compounding interest slamming that deferred loan. Monthly interest accrual being capped will be one of the greatest advantages for borrowers who use default programs, or financial hardship forbearance programs.

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

Reforming Student Debt Relief

President Obama’s student loan forgiveness plan is taking a multi-pronged approach to the problems of excessive student loan debt. Plan on seeing yearly reforms, and changes to this ongoing new program. The positive side is as time goes on, more borrowers will become eligible for the debt relief and other reforms will be implemented, hopefully to grandfather some of the loans from past decades. Relief is needed for students of today, as an encouragement tool to be able to attend college, but with that being said, President Obama’s student loan forgiveness plan needs to identify other generations experiencing the burden of excessive educational loan debt.

The President couldn’t have said it any better in his speech for 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.”